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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-------------------------------
FORM 10-Q/A
Amendment No. 1
|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
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(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 May 26, 2000, the Registrant had issued and outstanding an aggregate of
17,426,001 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.............................................. 1
Statement of Operations..................................... 2
Statement of Cash Flows..................................... 3
Notes to Financial Statements............................... 4
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations....................... 10
Item 3. Quantitative and Qualitative Disclosures About Market Risk.. 14
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.......................................... 16
Item 2. Changes in Securities and Use of Proceeds.................. 16
Item 6. Exhibits and Reports on Form 8-K........................... 16
Signatures.......................................................... 18
<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, net of allowance of $305 at September 30, 1999
and $186 at March 31, 1999 2,856 2,502
Notes receivable - current 352 2,367
Deposits and other current assets 1,325 4,035
--------- ---------
Total current assets 5,569 10,129
Property and equipment, net 3,985 4,807
Intangible assets, net 5,259 5,619
Net long term assets of discontinued operations 5,059 5,312
Notes receivable - non-current 828 771
Investments 1,550 1,550
Other assets 530 619
--------- ---------
$ 22,780 $ 28,807
========= =========
Liabilities and Shareholders' Equity
Current liabilities:
Lines of credit $ 1,008 $ 1,133
Accounts payable 3,917 2,885
Accrued professional fees and litigation costs 211 676
Other accrued liabilities 810 384
Current portion of long-term debt and capital lease obligations 1,004 1,160
Net current liabilities of discontinued operations 1,819 4,550
--------- ---------
Total current liabilities 8,769 10,788
Notes payable --- 8,183
Long-term debt 1,464 1,534
Capital lease obligations 1,634 1,817
Other liabilities 426 428
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 7,395
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 115,925 109,254
Accumulated deficit (119,359) (116,002)
Treasury stock at cost (5,757) (5,757)
---------- ----------
Total shareholders' equity 10,487 6,057
--------- ---------
$ 22,780 $ 28,807
========= =========
</TABLE>
See notes to condensed consolidated financial statements.
1
<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 $ 2,449 $ 720 $ 4,308 $ 849
Cost of sales 2,099 890 3,512 1,052
--------- --------- -------- -------
Gross profit (loss) 350 (170) 796 (203)
Selling and administrative expenses 2,766 1,294 4,958 2,116
--------- --------- -------- -------
Operating loss (2,416) (1,464) (4,162) (2,319)
Interest expense (407) (27) (680) (42)
Non-operating income (expense):
Gain on sale of AGT 6,209 --- 6,209 ---
Other 78 (92) 183 (251)
--------- --------- -------- -------
6,287 (92) 6,392 (251)
--------- ---------- -------- --------
Income (loss) from continuing operations 3,464 (1,583) 1,550 (2,612)
Income (loss) from discontinued operations (2,992) 233 (4,753) 184
---------- --------- --------- -------
Net income (loss) $ 472 $ (1,350) $ (3,203) $(2,428)
========= ========== ========= ========
Income (loss) per common share - basic:
Continuing operations $ .27 $ (.20) $ .12 $ (.32)
Discontinued operations (.24) .03 (.40) .02
---------- --------- --------- --------
Net income (loss) per common share [basic] $ .03 $ (.17) $ (.28) $ (.30)
========= ========== ========= ========
Income (loss) per common share - diluted:
Continuing operations $ .22 $ (.20) $ .09 $ (.32)
Discontinued operations (.19) .03 (.31) .02
--------- --------- --------- -------
Net income (loss) per common share [diluted] $ (.03) $ (.17) $ (.22) $ (.30)
========== ========== ========= ========
Weighted average number of common shares outstanding
- basic 12,704 9,586 11,960 9,125
- diluted 15,602 9,586 15,070 9,125
</TABLE>
See notes to condensed consolidated financial statements.
2
<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 $ (3,203) $ (2,428)
Adjustments to reconcile loss to net cash provided (used)
by operating activities:
Depreciation and amortization 488 30
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 ---
Net change in discontinued operations (1,920) 8,066
Changes in current assets and liabilities 2,328 3,094
---------- ----------
Net cash provided (used) by operating activities (7,751) 9,645
----------- ----------
Investing activities:
Purchases of property and equipment (715) (186)
Proceeds from sales of marketable securities --- 16
Proceeds from sale of land --- 67
Change in notes receivable 57 270
Increase in investments in affiliate (383) (400)
Cash investment in INET --- (1,333)
Net change in discontinued operations (559) (2,152)
----------- -----------
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 (154) (29)
---------- ----------
Net cash provided by financing activities 9,162 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 ---
Beneficial conversion feature on preference shares --- 262
</TABLE>
See notes to condensed consolidated financial statements.
3
<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/A for the fiscal year ended March 31,
1999.
NOTE 2 DISCONTINUANCE OF SWITCH BUSINESS
-------------------------------------------
In May 2000, the Board of Directors of the Company approved a restructuring plan
that provides for the discontinuance and sale of the DSS Switch segment of the
business, which includes Coyote Technologies, LLC, Coyote Communications
Services, LLC and TelecomAlliance. As a result, the Company has reported the
operations of the DSS Switch business separately as discontinued operations in
the accompanying consolidated statement of operations. Also the assets and
liabilities of this segment are presented separately and summarized in the
accompanying consolidated balance sheets as follows (dollars in thousands):
<TABLE>
<CAPTION>
September 30, 1999 March 31, 1999
------------------ --------------
(Unaudited)
Current assets:
<S> <C> <C>
Accounts receivable $ 16,591 $ 9,790
Inventory 2,392 2,130
Prepaids and other current assets 223 286
-------- --------
$ 19,206 $ 12,206
-------- --------
Current liabilities:
Accounts payable 3,634 $ 5,275
Other accrued liabilities 3,817 3,515
Deferred revenue and customer deposits 13,502 7,810
Current portion capital leases 72 156
-------- --------
$ 21,025 $ 16,756
-------- --------
Net current liabilities of discontinued operations $ 1,819 $ 4,550
======== ========
Non-current assets:
Property and equipment, net $ 2,951 $ 3,374
Capitalized software development 2,008 1,604
Notes receivable 100 100
-------- --------
Net long-term assets of discontinued operations $ 5,059 $ 5,078
======== ========
</TABLE>
Expected operating results relating to the discontinued operations from April 1,
2000 until the expected disposal date will be included in the estimated loss on
disposal and will be recorded as a charge in the consolidated financial
statements in the fourth quarter of fiscal 2000. The Company expects to record a
4
<PAGE>
charge for estimated loss on disposal of the switch business of approximately
$10.0 million in fiscal 2000, which includes an estimated $3.0 million of
expected losses of the segment for the first two quarters of fiscal 2001. The
Company expects to dispose of the segment by the end of the second quarter of
fiscal 2001.
The operating results relating to the above discontinued segment are as follows
(dollars in thousands):
<TABLE>
<CAPTION>
3 Months Ended 6 Months Ended
------------------------------- --------------------------------
(Unaudited) (Unaudited)
Sept. 30, 1999 Sept. 30, 1998 Sept. 30, 1999 Sept. 30, 1998
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Net sales $ 5,069 $ 13,789 $ 13,615 $ 20,853
======== ========= ========== ========
Income (loss) from discontinued
operations $ (2,988) $ 1,133 $ (4,439) $ 1,084
========= ========= ========= ========
</TABLE>
After the decision to discontinue the switch business, the Company will be
operating in only one segment, long distance services.
1996 - 1997 Restructuring
-------------------------
In November 1996 (and revised in February 1997), the Board of Directors of
Coyote Network Systems, Inc. (the "Company") approved a restructuring plan (the
"Restructuring") to separate its telecom switching equipment business (the "CTL
Business") from the following businesses:
Segment Company
------- -------
Telecommunications equipment distribution C&L
Wire installation and service Valley
Wholesale distribution of meat and seafood Entree/APC
On February 3, 1997, the Company sold a majority of the assets of APC to
Colorado Boxed Beef Company. On November 20, 1997, the Company sold its
telecommunications equipment distributor subsidiary, C&L Communications, Inc.
("C&L"), to the management of C&L. In March 1998, the Company sold its 80% owned
wire installation and service subsidiary, Valley Communications Inc., to
Technology Services Corporation.
<PAGE>
As of June 18, 1999, the Company had collected all cash related to the sale of
discontinued operations of the meat and seafood segment except $410,000 due
under a note and the Company's only remaining asset of discontinued operations
was real estate related to the land and buildings of the discontinued APC
operation. Based upon an estimate of the market value of the real estate, the
Company took an additional charge of $900,000 in the second quarter of fiscal
1999. This charge is included in the loss from discontinued operations in the
condensed consolidated statement of operations for the three and six months
ended September 30, 1998. The asset book value as of March 31, 1999 was
$234,000, net of mortgages and reserves applicable to the property. This value
is included in the net long-term assets of discontinued operations as of March
31, 1999.
Prior to the sale of the land and buildings in July 1999, additional expenses of
$314,000 were incurred related to property taxes. These costs are included in
the loss from discontinued operations in the condensed consolidated statement of
operations for the three months ($4,000) and six months ($314,000) ended
September 30, 1999.
NOTE 3 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.
5
<PAGE>
("PVC"), Prinvest Financial Corp. ("PFC"; together with PVC, "Prinvest") and
Arnold A. 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 18 months after the
Sale, 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, which the Company estimates will be less than
$50,000 and will record any such revenue upon receipt. 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 did not receive any immediate cash payments as a result of the Sale.
In addition, for the 18 months after the Sale, the Company will 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. As of May 26, 2000, the Company has not
received any switch purchase orders from AGT and does not anticipate any. Coyote
Communications Services, LLC, an affiliate included in discontinued operations,
will 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.
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
five-year options to purchase a total of 608,750 shares of the Company's common
stock to certain employees. The per share exercise prices of these grants are
equal to the closing market price of the Company's common stock on the grant
date and range from $4.50 to $5.75. These options vest in one-third increments
over three years.
During the quarter ended on September 30, 1999, in consideration for
administrative consulting services, the Board of Directors granted fully vested
options to purchase a total of 302,500 shares of the Company's common stock at
an exercise price of $4.50 per share and a six month term to certain outside
consultants. The closing market price of the Company's common stock on the grant
date was $4.50. 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, Mr. Daniel W. Latham, the Company's President and Chief
Operating 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
holders of Class B Units.
In September 1999, Mr. James J. Fiedler, the Company's former Chairman and Chief
Executive Officer, exercised warrants to acquire 75,075 shares of the Company's
common stock at an exercise price of $2.86 per share.
6
<PAGE>
During the quarter ended September 30, 1999, a total of 195,566 vested options
were exercised for $0.9 million 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 July 1999, we received an offer for a commitment for a stand-by credit
facility from certain shareholders that would provide a funding commitment to us
of $3.5 million. The shareholders offering this facility were Strategic
Restructuring Partnership, Mr. Alan J. Andreini, Junction Investors, Ardent
Research Partners and Mr. Fred Stein. This facility would be secured by the
stock of INET, bear 12.5% interest on the outstanding principal balance and be
repayable on March 31, 2000. We intend to enter into a definitive agreement only
if these funds are needed to support the operation.
In September 1999, Mr. James J. Fiedler, the Company's former 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.
In October and November 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 in October 1999. This loan
bore interest at bank's prime rate (8.25% at September 30, 1999) plus 1% per
year, was repayable on demand and was 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 in November
1999. This loan bore interest at the rate of 17.5% per year and was repayable,
on demand by the lenders, no earlier than March 31, 2000. The maximum term of
the loan was three years to November 2002. This loan was secured by a pledge of
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 were
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 the quarter
ended September 30, 1999 and $1,350,000 was received by the Company during
October and November 1999. These borrowings together with the accrued interest
were fully repaid in February and April 2000.
On January 25, 2000, the Company entered into a Financial Services Agreement
with First Venture Leasing LLC, pursuant to which a limited liability company
was formed by First Venture to offer certain leasing and credit packages to the
Company's customers. First Venture is an entity in which Mr. James McCullough,
the Company's Chief Executive Officer and a director, had a 25% interest, which
he relinquished effective upon his becoming a director of the Company on
February 2, 2000. The terms of the agreement with First Venture were the result
of arms' length negotiation in which Mr. McCullough did not participate. The
agreement with First Venture was approved by the Company's Board of Directors.
In connection with the Financial Services Agreement, First Venture was issued
620,000 warrants to purchase common stock at $5.00 per share and 261,600 warrant
7
<PAGE>
at $7.35. The closing price of the Company's common stock at the date of grant
was $11.00. These warrants vested upon grant.
These warrants are subject to shareholder approval, therefore, the Company will
determine the charge, if any, to earnings once shareholder approval is obtained.
On January 26, 2000, the Company also entered into a Remarketing Agreement and
two separate License Agreements with the LLC formed by First Venture, pursuant
to which such LLC will act as the Company's agent in remarketing equipment
leased to third parties upon the termination of such leases and will have the
right to use certain trademarks, service marks, trade names and other
designations in connection with the services to be provided by the LLC.
On January 26, 2000, the Company also entered into a Consulting Agreement with
KRJ, LLC. Pursuant to the Consulting Agreement, KRJ provided assistance in
identifying strategic partners and business opportunities, making introductions
to IP Telephony customers, introducing new management, restructuring vendor
finance programs, investor relations, and identifying credit facilities. The
Company issued to KRJ 2,000,000 shares of common stock. Of such shares,
1,250,000 will be held in escrow to be released to KRJ in three equal annual
installments, subject to acceleration if certain common stock price targets are
met and sustained. In addition, unless there is a change of control of the
Company (as defined in the Consulting Agreement), KRJ has agreed not to sell,
pledge, hypothecate or otherwise transfer any of the 2,000,000 shares for a
period 12 months after the respective dates of delivery of any of such shares.
Mr. McCullough has an approximately one-third interest in KRJ and the balance of
KRJ is owned by affiliates of First Venture. The Consulting Agreement also
provides that over the next three years, KRJ will provide assistance in further
identification of additional business opportunities both in the domestic and
international markets. Compensation for these additional services will be
specifically negotiated at a future date. The Consulting Agreement has been
approved by the Company's Board of Directors and the terms of the agreement with
KRJ were the result of arms' length negotiation in which Mr. McCullough did not
participate. In connection with the issuance of the 2,000,000 shares to KRJ, the
Company anticipates recording a one-time, non-cash charge to earnings of
approximately $10 million in the fourth quarter of fiscal 2000.
In January 2000, the Company restructured its management and business strategy.
On January 14, 2000 the Company issued options to Mr. McCullough to purchase
750,000 shares of common stock at $5.00 per share. The closing price of the
Company's stock on the date of grant was $5.50. Three hundred thousand options
vested upon grant, with the remaining options vesting in one-third increments
over three years, beginning January 14, 2001, subject to acceleration if certain
common stock price targets are met and sustained. The options are subject to
shareholder approval, therefore, the Company will determine the charge, if any,
to earnings once shareholder approval is obtained.
NOTE 6 EARNINGS AND LOSS PER COMMON SHARE
--------------------------------------------------------------------------------
The basic loss per common share is determined by using the weighted average
number of shares of common stock outstanding during each period. Diluted loss
per common share is equal to the basic loss per share for all periods with a
loss from continuing operations. The effect of options and warrants would be
antidilutive.
8
<PAGE>
The beneficial conversion feature applicable to the Series A Convertible
Preferred Stock has been accounted for as a dividend to Series A Convertible
Preferred shareholders. In computing the earnings or net loss per share
applicable to common stock shareholders, all dividends on preferred stock have
been deducted from the earnings or added to the losses to arrive at the earnings
or losses applicable to common shares as follows:
<TABLE>
<CAPTION>
3 Months Ended 6 Months Ended
---------------------------------- ----------------------------------
Sept. 30, 1999 Sept. 30, 1998 Sept. 30, 1999 Sept. 30, 1998
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Net income (loss) $ 472 $ (1,350) $ (3,203) $ (2,428)
Beneficial conversion feature --- (262) --- (262)
Preferred dividend (75) (29) (154) (29)
---------- ---------- ---------- ----------
Net income (loss) applicable to $ 397 $ (1,641) $ (3,357) $ (2,719)
Common stock --------- --------- --------- ---------
</TABLE>
NOTE 7 SUBSEQUENT EVENTS
-------------------------------------------------------------------------------
Subsequent to September 30 1999, the following events have occurred:
1. In December 1999 and January 2000, JNC Opportunity Fund Ltd., the holder of
600 shares of 5% Series A Convertible Preferred Stock, converted a total of
356 shares of Series A Preferred Stock and accrued dividends into shares of
the Company's common stock. A total of 626,835 shares of common stock were
issued.
2. In January and February 2000, the Company raised $13.9 million (net of
expenses) from the sale of approximately 3.2 million shares of 6% Series B
Convertible Preferred Stock.
3. In February 2000, the Company sold its approximately 9% interest in
Systeam, S.p.A. for $1.2 million in cash. A gain on the sale of
approximately $0.4 million will be recorded in the fourth quarter of fiscal
2000.
4. In May 2000, the Board of Directors approved a plan that included the
discontinuance of the Company's switch business. The financial statements
have been restated to present the operations of the switch business as
discontinued operations (see Note 2.)
9
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
--------------------------------------------------------------------------------
General
-----------
Discontinuance of Switch Segment
In May 2000, we decided to discontinue and dispose of our switch business
including the manufacture, development, sale and service of DSS Switches and IP
Gateway equipment. Prior to the May 2000 decision, this segment was our largest
segment in terms of revenues.
Expected operating results relating to the discontinued operations from April 1,
2000 until the expected disposal date will be included in the estimated loss on
disposal and will be recorded as a charge in the consolidated financial
statements in the fourth quarter of fiscal 2000. The Company expects to record a
charge for estimated loss on disposal of the switch business of approximately
$10.0 million in fiscal 2000, which includes an estimated $3.0 million of
expected losses of the segment for the first two quarters of fiscal 2001. The
Company expects to dispose of the segment by the end of the second quarter of
fiscal 2001.
Following this decision to discontinue the operations of the telecommunications
switching business, our business is reported for as one continuing operating
segment, long distance services.
As a result of the discontinuances, dispositions, acquisitions and other events
described above, the comparison of year-to-year results may not be meaningful.
Results of Operations
--------------------------------------------------------------------------
The results for the second quarter and half-year ended September 30, 1999 and
the comparative historical results have been restated to reflect the operations
of our DSS Switch business segment separately as discontinued operations. The
following discussion relates to the continuing operations of the long distance
services and our corporate administration offices.
The long distance services business was comprised of two subsidiaries: AGT,
which was acquired in April 1998 and sold in October 1999; and INET, which was
acquired in September 1998.
Three Months Ended September 30, 1999 versus Three Months Ended
September 30, 1998
-------------------------------------------------------------------------------
The continuing operations of the two international long distance service
subsidiaries that were acquired during fiscal 1999 generated revenues of $2.4
million in the second quarter of fiscal 2000 compared to $0.7 million for the
second quarter of fiscal 1999, an increase of $1.7 million, or 242%. This
increase was primarily due to $2.1 million of revenues generated through INET,
which was acquired after the second quarter of fiscal 1999, offset by a decrease
in revenues of $0.4 million for AGT. The decrease in revenues of AGT resulted
from a delay in negotiation of contract renewals.
Cost of sales for the second quarter of fiscal 2000 were $2.1 million, compared
to $0.9 million for the prior quarter, an increase of $1.2 million, or 133%. The
increase in cost of sales primarily results from our acquisition of INET after
the second quarter of fiscal 1999 and also reflects lower costs obtained
particularly on the traffic routes to customers in Asia.
Gross profit for the second quarter of fiscal 2000 was $0.4 million, compared to
a loss of $0.2 million for the prior quarter. Gross profit for the second
quarter of fiscal 2000 represented 14% of revenues. The improvement over the
loss in the second quarter of fiscal 1999 was due to the increases in revenue
generated by INET at more favorable profit margins.
10
<PAGE>
Selling and administrative expenses of the continuing operations for the second
quarter of fiscal 2000 were $2.8 million, compared to $1.3 million for the
second quarter of fiscal 1999, an increase of $1.5 million, or 115%. This
increase was primarily related to the additional personnel related to INET (35
personnel), which was not acquired until the end of the quarter of the prior
year and increases in advertising and promotional expenses of approximately $0.6
million to promote growth of the long distance service business.
The operating loss for the second quarter of fiscal 2000 was $2.4 million,
compared to a loss of $1.5 million in the second quarter of fiscal 1999, an
increase of $0.9 million, or 60%. This increase was primarily due to the
increase in the operating expenses described above, offset by increased revenue
and lower cost of sales.
Interest expense for the second quarter of fiscal 2000 was $0.4 million,
compared to $0.03 million for the second quarter of fiscal 1999. The increased
expense results from a $1.7 million increase in notes payable and a $0.2 million
increase in borrowings under a line of credit to finance our long distance
service operations.
Non-operating income for the second quarter of fiscal 2000 was $6.3 million,
compared to non-operating expense of $0.1 million in the second quarter of
fiscal 1999. Non-operating income in the second quarter of fiscal 2000 included
a $6.2 million non-cash gain recorded on the Company's sale of AGT.
Non-operating expense in the second quarter of fiscal 1999 consisted primarily
of losses on marketable securities.
Income from continuing operations for the second quarter of fiscal 2000 was $3.5
million, compared to a loss from continuing operations of $1.6 million for the
second quarter of fiscal 1999. The increase resulted primarily from the non-cash
gain from the sale of AGT and the other reasons discussed above.
The loss from discontinued operations for the second quarter of fiscal year 2000
was $3.0 million, compared to income from discontinued operations of $0.2
million in the second quarter of fiscal 1999. This decrease was primarily due to
decreases in revenues of $8.7 million for the period and a decrease on margins
from 42% to 15%. This decrease in margin is mainly due to a deferral of profit
of $3.3 million related to switching equipment supplied under extended payment
terms granted to customers in the process of obtaining third party lease
financing. This profit will be recognized when the Company receives payment from
these customers. The income from discontinued operations of $0.2 million in the
second quarter of the 1999 fiscal year was comprised of income of $1.1 million
from the discontinued switch business and a loss of $0.9 million related to the
reduction in market value of land and buildings of the APC operation
discontinued in fiscal 1997.
Six Months Ended September 30, 1999 versus Six Months Ended September 30, 1998
--------------------------------------------------------------------------------
The continuing operations of the two international long distance service
subsidiaries that were acquired during fiscal 1999 generated revenues of $4.3
million in the first six months of fiscal 2000 compared to $0.8 million for the
first six months of fiscal 1999, an increase of $3.5 million, or 437%. This
increase was primarily due to $3.9 million of revenues generated through INET,
which was acquired in September 1998, offset by a decrease in revenues of $0.4
million for AGT. The decrease in revenues of AGT results from a delay in
finalizing negotiations of contract renewals.
Cost of sales for the first six months of fiscal 2000 were $3.5 million,
compared to $1.1 million for the prior period, an increase of $2.4 million, or
218%. The increase in cost of sales primarily results from our acquisition of
INET after the first six months of fiscal 1999 and also reflects the lower costs
obtained on traffic routes to customers in Asia.
Gross profit on the continuing long distance services for the first six months
of fiscal 2000 was $0.8 million, compared to a loss of $0.2 million for the
prior period. Gross profit for the first six months of fiscal 2000 represented
18% of revenues. The improvement over the loss in the first six months of fiscal
1999 was due to the increases in revenue generated by INET at more favorable
margins.
11
<PAGE>
Selling and administrative expenses of the continuing operations for the first
six months of fiscal 2000 were $5.0 million, compared to $2.1 million for the
first six months of fiscal 1999, an increase of $2.9 million, or 138%. This
increase was primarily related to the additional personnel related to INET which
was not acquired until the end of the first six months of the prior year and to
increases in advertising and promotional expenses of approximately $0.9 million.
The operating loss for the first six months of fiscal 2000 was $4.2 million,
compared to $2.3 million in the first six months of fiscal 1999, an increase of
$1.9 million, or 83%. This increase was primarily due to the increase in selling
and administrative expenses described above, offset by increased revenue and
lower cost of sales.
Interest expense for the first six months of fiscal 2000 was $0.7 million,
compared to $0.04 million for the first six months of fiscal 1999. The increased
expense results from a $2.4 million increase in notes payable, offset by a
slight decrease in borrowings under a line of credit.
Non-operating income for the first six months of fiscal 2000 was $6.4 million,
compared to non-operating expense of $0.3 million in the first six months of
fiscal 1999. Non-operating income in the first six months of fiscal 2000
included a $6.2 million non-cash gain recorded on the Company's sale of AGT.
Non-operating expense in the first six months of fiscal 1999 consisted primarily
of losses on the sale of marketable securities.
Income from continuing operations for the first six months of fiscal 2000 was
$1.6 million, compared to a loss from continuing operations of $2.6 million for
the first six months of fiscal 1999. The increase resulted primarily from the
non-cash gain from the sale of AGT and the other reasons discussed above.
The loss from discontinued operations for the first six months of fiscal year
2000 was $4.8 million, compared to income from discontinued operations of $0.2
million in the first six months of fiscal 1999. This decrease was primarily due
to decreases in revenues of $7.3 million for the period and a decrease in
margins from 44% to 25%. This decrease in margin is mainly due to deferrals of
profit in the first six months of fiscal year 2000 of $7.3 million relating to
switching equipment supplied under extended payment terms granted to customers
who are in the process of obtaining third party lease financing. This profit
will be recognized when the Company receives payment from these customers. The
income from discontinued operations of $0.2 million in the first six months of
the 1999 fiscal year was comprised of income of $1.1 million from the
discontinued switch business and a loss of $0.9 million related to the reduction
in market value of land and buildings of the APC operation discontinued in
fiscal 1997.
Liquidity and Capital Resources
-----------------------------------------------------------------
As of September 30, 1999, we had a negative working capital of $3.2 million.
During the first six months of fiscal 2000 we used $7.8 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 losses incurred
in the continuing long distance services and in the discontinued switch business
and to the increases in working capital required to support the discontinued
switch business operations.
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 of $0.7 million in the first six months of fiscal 2000 represented an
increase of $0.5 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 business. 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.
Investment expenditure on discontinued operations of $0.6 million comprised
capital expenditure on equipment and software for the first six months of fiscal
2000 compared to $2.2 million in the prior year.
12
<PAGE>
Financing activities provided cash of $9.2 million during the first six months
of fiscal 2000 compared to $6.6 million during the first six months of fiscal
2000. This increase of $2.6 million included $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 July 1999, we received an offer for a commitment for a stand-by credit
facility from certain shareholders that would provide a funding commitment to us
of $3.5 million. The shareholders offering this facility were Strategic
Restructuring Partnership, Mr. Alan J. Andreini, Junction Investors, Ardent
Research Partners and Mr. Fred Stein. This facility would be secured by the
stock of INET, bear 12.5% interest on the outstanding principal balance and be
repayable on March 31, 2000. We intend to enter into a definitive agreement only
if these funds are needed to support the operation.
In October and November 1999, the Company 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 in October 1999. This loan bore
interest at bank's prime rate plus 1% per year (9.25% at September 30, 1999),
was repayable on demand and was 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 in November
1999. This loan bore interest at the rate of 17.5% per year and was repayable,
on demand by the lenders, no earlier than March 31, 2000. The maximum term of
the loan was three years to November 2002. This loan was secured by a pledge of
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 were
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
recognized over the term of the debt.
Of the above funding, $475,000 was received by the Company during the quarter
ended September 30, 1999 and $1,350,000 was received by the Company during
October and November 1999. These borrowings together with the accrued interest
were fully repaid in February and April 2000.
As of March 31, 1999, we had notes payable of $8.2 million. These notes were
secured by certain of our assets and by 708,692 shares of our common stock and
bore interest at the bank's prime rate (8.25% at September 30, 1999) plus 1/2%.
These notes were due on demand. In July 1999, the payment date was extended to
December 2001. In September 1999, we sold one of our subsidiaries (AGT) which
included the assumption of these notes by the buyer. In addition, we had capital
lease obligations of $2.6 million at September 30, 1999, payable through 2004.
We have a $2.2 million revolving line of credit secured against certain trade
receivables. As at September 30, 1999 $1.0 million had 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 (8.25% at September 30, 1999) plus 4%.
The line of credit expires on June 30, 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.
In January and February 2000, we completed a private placement with accredited
investors and sold 3,157,895 shares of our 6% Series B Preferred Stock at $4.75
per share. The total cash we received was $13.9 million, net of fees and
expenses associated with the placement. In February 2000, we completed the sale
of our investment in Systeam, S.p.A. and received a cash payment of $1.2
million. A gain on the sale of this investment of approximately $0.4 million
will be recorded in the fourth quarter of fiscal 2000.
13
<PAGE>
In March 2000, four of our customers completed third party lease contracts in
respect of $14.2 million of switching equipment previously sold under extended
payment terms. In April 2000, we received payments of $11.5 million. We expect
to receive the remaining balance of $2.7 million once the lessees have completed
their payment obligations to the lessors.
We believe that we will be able to continue to fund our operations and
acquisitions by obtaining additional outside financing; however, we cannot
assure you that we will be able to obtain the necessary financing when needed on
acceptable terms or at all.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
--------------------------------------------------------------------------------
The Company is not currently subject to a significant level of direct market
risk related to foreign currency exchange rates, commodity prices or equity
prices. The Company has no derivative instruments and does not expect to derive
a material amount of its revenues from interest bearing securities. Currently
the Company has no significant foreign operations. To the extent that the
Company establishes significant foreign operations in the future, it will
attempt to mitigate risks associated with foreign currency exchange rates
contractually and through the use of hedging activities and other means
considered appropriate. The Company holds no equity market securities, but does
face equity market risk relative to its own equity securities. This risk is most
likely to be manifested by influencing the Company's ability to raise debt or
equity financing, if needed.
Our primary market risk exposure is interest rate risk related to our borrowings
under our revolving line of credit.
Interest Rate Sensitivity Model
--------------------------------------------------------------------------
The table below presents the principal (or notional) amounts and related
interest of our borrowings by expected maturity dates. The table presents the
borrowings that are sensitive to changes in interest rates and the effect on
interest expense of future hypothetical changes in such rates.
Twelve Months Ended September 30
--------------------------------
(U.S. Dollars - Thousands)
------------------------------------------
1999 2000 2001 2002
---- ---- ---- ----
Line of credit borrowings 1,008 $ 1,000 $ 500 $ 500
Interest expense (A) 85 83 42 42
Interest expense (B) 93 93 46 46
Interest expense (C) 73 73 36 36
- The borrowings bear interest at the bank's prime rate plus 1/2% for the
line of credit.
- The interest expense shown for line (A) is based upon the actual bank's
prime rate at September 30, 1999 of 8.25%.
- The interest expense shown for line (B) is based upon a hypothetical
increase of one percentage point in the bank's prime rate to 9.25%.
- The interest expense shown for line (C) is based upon a hypothetical
decrease of one percentage point in the bank's prime rate to 7.25%.
14
<PAGE>
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 expected 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/A for the fiscal year
ended March 31, 1999. The Company does not undertake any obligation to update or
revise any forward looking statements whether as a result of new information,
future events or otherwise.
15
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
--------------------------------------------------------------------------------
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 previously reported. 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 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
--------------------------------------------------------------------------------
c) Information regarding issuances of securities not registered under the
Securities Act of 1933 is incorporated by reference from Note 5 of the
Condensed Consolidated Financial Statements in Item 1 of Part I. The
sale of such securities was exempt from registration under Section 4(2)
of the Securities Act of 1933.
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
--------------------
* Previously filed.
b) Reports on Form 8-K:
(1) A Form 8-K dated May 24, 1999, was filed by the Company on July 6,
1999, reporting the hearing on May 24, 1999, at which 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
16
<PAGE>
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. The report was filed under Item 5, Other Events,
and Item 7, Financial Statements and Exhibits.
17
<PAGE>
SIGNATURES
--------------------------------------
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.
COYOTE NETWORK SYSTEMS, INC.
DATE: May 26, 2000 By: /s/ James R. McCullough
---------------------------------
James R. McCullough
Chief Executive Officer
(Principal Executive Officer)
DATE: May 26, 2000 By: /s/ Brian A. Robson
---------------------------------
Brian A. Robson
Executive Vice President and
Chief Financial Officer
(Principal Financial and Accounting
Officer)
18
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