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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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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 December 31, 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 2. Changes in Securities and Use of Proceeds................. 16
Item 6. Exhibits and Reports on Form 8-K.......................... 16
Signatures ........................................................ 17
<PAGE>
PART I - FINANCIAL INFORMATION
------------------------------
ITEM 1. FINANCIAL STATEMENTS
COYOTE NETWORK SYSTEMS, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(Dollars in Thousands, Except Share Amounts)
<TABLE>
<CAPTION>
December 31, March 31,
1999 1999
---------------- ----------
Assets (Unaudited)
Current assets:
<S> <C> <C>
Cash and cash equivalents $ 613 $ 1,225
Receivables net of allowance of $137 at December 31, 1999
and $186 at March 31, 1999 3,400 2,502
Notes receivable - current 12 2,367
Net current assets of discontinued operations 392 ---
Other current assets 1,734 4,035
--------- ---------
Total current assets 6,151 10,129
Property and equipment, net 4,016 4,807
Intangible assets, net 5,075 5,619
Net long term assets of discontinued operations 4,598 5,312
Notes receivable - non-current 126 771
Investments 1,592 1,550
Other assets 545 619
--------- ---------
$ 22,103 $ 28,807
========= =========
Liabilities and Shareholders' Equity
Current liabilities:
Lines of credit $ 1,414 $ 1,133
Accounts payable 4,635 2,885
Accrued professional fees and litigation costs 158 676
Other accrued liabilities 1,245 384
Current portion of long-term debt and capital lease obligations 3,039 1,160
Net current liabilities of discontinued operations --- 4,550
--------- ---------
Total current liabilities 10,491 10,788
Notes payable --- 8,183
Long-term debt 1,464 1,534
Capital lease obligations 1,634 1,817
Other liabilities 368 428
Commitments and contingencies
Shareholders' equity:
Preferred stock - $.01 par value: authorized 5,000,000 shares;
issued 590 and 700 shares, liquidation preference of $10,000 per share 5,900 7,395
Common stock - $1 par value. Authorized 30,000,000 shares,
issued 14,495,236 and 11,167,456 shares 14,495 11,167
Additional paid-in capital 117,981 109,254
Accumulated deficit (124,473) (116,002)
Treasury stock at cost (5,757) (5,757)
---------- ----------
Total shareholders' equity 8,146 6,057
--------- ---------
$ 22,103 $ 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 9 Months Ended
---------------------- ---------------------
Dec. 31, Dec. 31, Dec. 31, Dec. 31,
1999 1998 1999 1998
---------- ---------- --------- --------
<S> <C> <C> <C> <C>
Net sales $ 2,858 $ 3,783 $ 7,166 $ 4,632
Cost of sales 2,578 3,481 6,090 4,533
-------- ------- -------- -------
Gross profit 280 302 1,076 99
Selling and administrative expenses 1,813 2,668 6,771 4,784
-------- ------- -------- -------
Operating loss (1,533) (2,366) (5,695) (4,685)
Interest expense (420) (221) (1,100) (263)
Non-operating income (expense):
Gain on sale of AGT --- --- 6,209 ---
Other 24 (17) 207 (268)
-------- -------- -------- --------
24 (17) 6,416 (268)
-------- -------- -------- --------
Loss from continuing operations (1,929) (2,604) (379) (5,216)
Loss from discontinued operations (3,113) (1,502) (7,866) (1,318)
--------- -------- --------- --------
Net loss $ (5,042) $(4,106) $ (8,245) $(6,534)
========= ======== ========= ========
Loss per common share (basic & diluted):
Continuing operations $ (.15) $ (.34) $ (.05) $ (.66)
Discontinued operations (.24) (.15) (.64) (.14)
--------- -------- --------- --------
Net loss per common share (basic & diluted) $ (.39) $ (.49) $ (.69) $ (.80)
========= ======== ========= ========
Weighted average number of common shares outstanding (basic & diluted) 13,257 10,216 12,308 9,604
======== ======= ======== =======
</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>
9 MONTHS ENDED
--------------------------------
December 31, December 31,
Operating activities: 1999 1998
------------- ----------
<S> <C> <C>
Net loss $ (8,245) $ (6,534)
Adjustments to reconcile loss to net cash provided (used)
by operating activities:
Depreciation and amortization 964 439
Gain on sale of land --- (20)
Gain on sale of AGT (6,209) ---
Provision for loss on discontinued operations 314 900
Provision for common stock warrants issued 975 ---
Net change in discontinued operations (4,190) 2,928
Changes in current assets and liabilities 3,215 (1,332)
-------- ---------
Net cash used by operating activities (13,176) (3,619)
--------- ---------
Investing activities:
Purchases of property and equipment (1,038) (637)
Proceeds from sales of marketable securities --- 16
Proceeds from sale of land --- 67
Change in notes receivable (43) 270
Increase in investments in affiliate (425) (400)
Cash investment in INET --- (1,333)
Net change in discontinued operations (353) (2,808)
--------- ---------
Net cash used by investing activities (1,859) (4,825)
--------- ---------
Financing activities:
Repayments of long-term debt and capital lease obligations (70) (142)
Common stock issued net of expenses 13,582 752
Redemption of preferred stock (4,000) ---
Increase in notes payable 4,856 ---
Increase in borrowing on line of credit 281 ---
Preference shares dividend (226) (117)
Preference stock issued net of expenses --- 6,345
-------- --------
Net cash provided by financing activities 14,423 6,838
-------- --------
Decrease in cash and cash equivalents (612) (1,606)
Cash and cash equivalents:
At beginning of the period 1,225 3,746
-------- --------
At end of the period $ 613 $ 2,140
======== ========
Non-cash transactions:
Issuance of common stock warrants $ 975 $ 485
Conversion of Class B Units into common stock 606 ---
Conversion of convertible Preferred Stock and interest into
common stock 103 3,407
Discount granted for investment in affiliate --- 900
Gain on sale of AGT 6,209 ---
Notes receivable off-set against trade payables 1,093 ---
Beneficial conversion feature on preference shares --- 1,050
</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 and nine months
ended December 31, 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
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In May 2000, the Board of Directors of the Company approved a restructuring plan
that provides for the discontinuance and disposal 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>
December 31, 1999 March 31, 1999
----------------- --------------
(Unaudited)
Current assets:
<S> <C> <C>
Accounts receivable $ 16,576 $ 9,790
Inventory 2,249 2,130
Prepaids and other current assets 192 286
-------- --------
$ 19,017 $ 12,206
-------- --------
Current liabilities:
Accounts payable 3,268 $ 5,275
Other accrued liabilities 3,121 3,515
Deferred revenue and customer deposits 12,236 7,810
Current portion capital leases -- 156
-------- --------
$ 18,625 $ 16,756
-------- --------
Net current assets (liabilities) of discontinued operations $ 392 $ (4,550)
======== =========
Non-current assets:
Property and equipment, net $ 2,690 $ 3,374
Capitalized software development 1,808 1,604
Notes receivable 100 100
-------- --------
Net long-term assets of discontinued operations $ 4,598 $ 5,078
======== ========
</TABLE>
4
<PAGE>
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.
The operating results relating to the above discontinued segment are as follows
(dollars in thousands):
<TABLE>
<CAPTION>
3 Months Ended 9 Months Ended
------------------------------ ------------------------------
(Unaudited) (Unaudited)
Dec. 31, 1999 Dec. 31, 1998 Dec. 31, 1999 Dec. 31, 1998
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Net sales $ 3,964 $ 9,148 $ 17,579 $ 30,001
======== ========= ========== ========
Income (loss) from discontinued
operations $ (3,113) $ (1,502) $ (7,552) $ (418)
========= ========== ========== =========
</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.
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 months ended
September 30, 1998 and the nine months ended December 31, 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.
5
<PAGE>
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 nine months ($314,000) ended December 31, 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.
("PVC"), Prinvest Financial Corp. ("PFC"; together with PVC, "Prinvest") and
Arnold A. Salinas ("Salinas"), the Company sold its approximately 80% membership
interest in AGT to AGT's remaining member, AGTI, which previously held an
approximately 20% membership interest in AGT (the "Sale").
In consideration for the Sale, the Company will receive, for next 18 months, a
monthly margin participation payment from AGT equal to $0.0025 per minute of
telecommunications traffic switched or routed by AGT through AGT's
telecommunications network, 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 released from its obligations under its pledge
agreement with Prinvest which pledge 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 under the Credit Facility. In addition, as a result of the Sale, the
Company will no longer be required to reflect the Credit Facility on its
consolidated financial statements and, accordingly, the Company has recognized a
gain of $6,209,000 from the Sale. The Company will not receive any immediate
cash payments as a result of the Sale.
In addition, for the next 18 months, the Company shall be the exclusive supplier
of telecommunications switches to AGT; AGT shall receive a fifty percent
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 of the Company which is included in
the discontinued operations, shall continue to provide maintenance and technical
support services to AGT on a month-to-month renewable basis, pursuant to the
parties' existing maintenance and servicing agreement.
For the nine months ended December 31, 1999, sales, operating losses,
depreciation and capital expenditures of $425,000, $1,602,000, $59,000 and
$346,000, respectively, of Coyote Gateway are included in the Company's long
distance services business. The identifiable assets as at December 31, 1999,
however, exclude the assets of Coyote Gateway.
NOTE 4 SHAREHOLDERS' EQUITY
--------------------------------------------------------------------------------
Options and Warrants
----------------------------------------------
During the quarter ended December 31, 1999, the Board of Directors granted
five-year options to purchase a total of 308,481 shares of the Company's common
stock to certain employees. The per share exercise prices of these grants is
6
<PAGE>
equal to the closing market price of the Company's common stock on the date of
the grant and range from $4.00 to $4.625. These options vest in one-third
increments over three years.
During the quarter ended December 31, 1999, in consideration for administrative
consulting services, the Board of Directors granted to certain outside
consultants fully vested options to purchase 212,000 shares of the Company's
common stock at an exercise price of $4.00 per share and 55,000 shares of the
Company's common stock at $4.50 per share and a three-month term. The per share
exercise prices of these grants is equal to the closing market price of the
Company's common stock on the date of the grant. A fair market value of $224,000
was recorded as administrative expense for these options. The fair market value
was determined using the Black Scholes model.
In December 1999, two employees, David Held and Bruce Thomas, converted their
holdings of 500 Class B Units into 275,624 shares of the Company's common stock
in accordance with the terms of conversion available to the holders.
During the quarter ended December 31, 1999, a total of 524,979 options were
exercised which resulted in proceeds of $2.3 million. These exercises were 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 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 December 31, 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.
These borrowings together with accrued interest were fully repaid in February
and March 2000.
On January 25, 2000, the Company entered into a Financial Services Agreement
with First Venture Leasing LLC ("First Venture"), pursuant to which a limited
liability company (the "LLC") 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
7
<PAGE>
becoming an officer and 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 our 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
warrants at $7.35. The closing price of the Company's common stock on 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 shall act as the Company's agent in remarketing equipment
leased to third parties upon the termination of such leases and shall 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 ("KRJ"). 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 common 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 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 due to the
loss from continuing operations as the effect of options and warrants would be
antidilutive .
8
<PAGE>
The beneficial conversion feature ($1.05 million) applicable to the Series A
Convertible Preferred Stock has been accounted for as a dividend to Series A
Convertible Preferred shareholders and has been recorded from the date of the
Series A sale through to the earliest date the preferred shareholders could
convert into common stock (September 1, 1999 to December 31, 1999). 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 9 Months Ended
------------------------------- -------------------------------
Dec. 31, 1999 Dec. 31, 1998 Dec. 31, 1999 Dec. 31, 1998
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Net loss $ (5,042) $ (4,106) $ (8,245) $ (6,534)
Beneficial conversion feature --- (788) --- (1,050)
Preferred dividend (72) (88) (226) (117)
---------- ---------- ---------- ----------
$ (5,114) $ (4,982) $ (8,471) $ (7,701)
---------- --------- --------- ---------
</TABLE>
NOTE 7 SUBSEQUENT EVENTS
--------------------------------------------------------------------------------
Subsequent to December 31, 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 third quarter and nine months ended December 31, 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 December 31, 1999 versus Three Months Ended December 31, 1998
--------------------------------------------------------------------------------
The continuing operations of the two international long distance service
subsidiaries that were acquired during fiscal 1999 generated revenues of $2.9
million in the third quarter of fiscal 2000 compared to $3.8 million for the
third quarter of fiscal 1999, a decrease of $0.9 million, or 24%. This decrease
was primarily due to the decrease of $1.9 million, or 50%, of revenues from AGT
between the two periods as a result of its sale in October 1999. Revenues of
INET between the two periods increased by $0.7 million, or 32%, primarily due to
increased sales from international long distance services provided to Asia.
Cost of sales for the third quarter of fiscal 2000 were $2.6 million, compared
to $3.5 million for the prior quarter, a decrease of $0.9 million, or 26%. The
decrease in cost of sales primarily results from the sale of AGT in October 1999
offset by increases in cost of sales of INET of $0.6 million, or 30% due to the
increase in the volume of traffic carried.
Gross profit on the continuing long distance services was $0.3 million for the
third quarter of fiscal 2000 and of fiscal 1999. The slight improvement in gross
profit as a percentage of revenue was primarily due to more utilization of the
fixed costs of the INET switching equipment.
10
<PAGE>
Selling and administrative expenses of the continuing operations for the third
quarter of fiscal 2000 were $1.8 million, compared to $2.7 million for the third
quarter of fiscal 1999, a decrease of $0.9 million, or 33%. This decrease was
primarily due to the sale of AGT in October 1999 and reductions in corporate
marketing and administrative expenses. Selling and administrative expenses as a
percentage of revenues for the third quarter of fiscal 2000 were 63%, compared
to 71% for the third quarter of fiscal 1999.
The operating loss for the third quarter of fiscal 2000 was $1.5 million,
compared to $2.4 million in the third quarter of fiscal 1999, a decrease of $0.9
million, or 38%. This decrease was primarily due to decreases in cost of sales
and selling and administrative expenses described above that exceeded the
decrease in revenues.
Interest expense for the third quarter of fiscal 2000 was $0.4 million, compared
to $0.2 million for the third quarter of fiscal 1999. The increased expense
resulted primarily from an increase in notes payable.
Loss from continuing operations for the third quarter of fiscal 2000 was $1.9
million, compared to $2.6 million for the third quarter of fiscal 1999, a
decrease of $0.7 million, or 27%. The decrease resulted primarily from the
reduced level of selling and administrative expenses discussed above.
The loss from discontinued operations for the third quarter of fiscal year 2000
was $3.1 million, compared to $1.5 million in the third quarter of fiscal 1999,
an increase of $1.6 million or 107%. This increase was primarily due to
decreases in revenues of $5.2 million for the period, resulting from a reduction
in orders received for equipment shipments in the quarter and from lower margins
on equipment sales. Margin decreased from 26% to 3% due mainly to deferral of
profit of $2.3 million related to switching equipment supplied under extended
payment terms granted to customers who are in process of obtaining third party
lease financing. This profit will be recognized when the Company receives
payment from these customers.
Nine Months Ended December 31, 1999 versus Nine Months Ended December 31, 1998
--------------------------------------------------------------------------------
The continuing operations acquired during fiscal 1999 generated revenues of $7.2
million in the first nine months of fiscal 2000 compared to $4.6 million for the
first nine months of fiscal 1999, an increase of $2.6 million, or 57%. This
increase was primarily due to $4.6 million of revenues generated through INET,
which was acquired in September 1998, offset by a decrease in revenues of $2.0
million for AGT. The decrease in revenues of AGT primarily results from its sale
in October 1999.
Cost of sales for the first nine months of fiscal 2000 were $6.1 million,
compared to $4.5 million for the prior period, an increase of $1.6 million, or
36%. The increase in cost of sales primarily results from our acquisition of
INET and also reflects the increase in the sales volume, offset by decreases in
cost of sales of AGT resulting from its sale.
Gross profit on the continuing long distance services for the first nine months
of fiscal 2000 was $1.1 million, compared to $0.1 million for the prior period.
The improvement in gross profit was primarily due to the increases in revenue
generated by INET, with improved margins from the more profitable international
traffic to Asia.
Selling and administrative expenses of the continuing operations for the first
nine months of fiscal 2000 were $6.8 million, compared to $4.8 million for the
first nine months of fiscal 1999, an increase of $2.0 million, or 42%. This
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increase was primarily related to the additional selling and administrative
expenses incurred by INET which was acquired in the third quarter of fiscal
1999, offset by the reduction in expenses related to AGT, which was sold in the
third quarter of fiscal 2000.
The operating loss for the first nine months of fiscal 2000 was $5.7 million,
compared to $4.7 million in the first nine months of fiscal 1999, an increase of
$1.0 million, or 21%. This increase was primarily due to the increase in selling
and administrative expenses described above offset by the improvement in gross
profit.
Interest expense for the first nine months of fiscal 2000 was $1.1 million,
compared to $0.3 million for the first nine months of fiscal 1999. The increased
expense results from a $4.9 million increase in notes payable and a $0.3
increase in borrowings under a line of credit.
Non-operating income for the first nine months of fiscal 2000 was $6.4 million,
compared to non-operating expense of $0.3 million in the first nine months of
fiscal 1999. Non-operating income in the first nine 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 nine months of fiscal 1999 consisted
primarily of losses on the sale of marketable securities.
Loss from continuing operations for the first nine months of fiscal 2000 was
$0.4 million, compared to $5.2 million for the first nine months of fiscal 1999,
a decrease of $4.8 million or 92%. The decrease resulted primarily from the $6.2
million non-cash gain from the sale of AGT and the other reasons discussed
above.
The loss from discontinued operations for the first nine months of fiscal year
2000 was $7.9 million, compared to $1.3 million in the first nine months of
fiscal 1999, a increase of $6.6 million. This increase was primarily due to
decreases in revenues of $12.4 million for the period and a decrease in margins
from 41% to 21%. This decrease is mainly due to deferrals of profit in the first
nine months of $9.6 million relating to switching equipment supplied under
extended payment terms 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.
Liquidity and Capital Resources
---------------------------------------
As of December 31, 1999, we had a negative working capital of $4.3 million.
During the first nine months of fiscal 2000 we used $13.2 million compared to
using $3.6 million during the first nine 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 as
well as increases in working capital required to support the discontinued switch
business operations.
We used cash for investing activities of $1.9 million during the first nine
months of fiscal 2000 compared to $4.8 million used in the corresponding period
of fiscal 1999. Capital expenditures on equipment purchases of $1.0 million in
the first nine months of fiscal 2000 represented an increase of $0.4 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 $0.4 million comprised capital expenditure on
equipment and software for the first nine months of fiscal 2000 compared to $2.8
million in the prior year.
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Financing activities during the third quarter of fiscal 2000 provided $5.3
million, including $2.3 million from the exercises of stock options and
warrants, $2.4 million from increases in notes payable and a $0.4 million
increase in borrowings under a line of credit. Net cash provided by financing
activities for the first nine months of fiscal 2000 was $14.4 million, compared
to $6.8 million for the corresponding period of fiscal 1999. This increase of
$7.6 million results primarily from the net proceeds of a private placement in
May 1999 of $10.2 million, increases of $4.9 in notes payable and $3.4 million
from the exercise of stock options and warrants offset by a $4.0 million cost of
redemption of 100 shares of Series A Preference Shares.
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.
During the third quarter of 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 December 31,
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.
We had capital lease obligations of $2.6 million at December 31, 1999 payable
through 2004.
We have a $2.2 million revolving line of credit secured against certain trade
receivables. As at December 31, 1999, $1.4 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 December 31, 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.
13
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In January and February 2000, we completed two private placements 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 placements.
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.
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 net payments of $11.5 million. We
expect to receive the remaining balance of $2.7 million once the lessees
complete their payment obligations to the lessor.
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 December 31
-------------------------------
(U.S. Dollars - Thousands)
1999 2000 2001 2002
---- ---- ---- ----
Line of credit borrowings $1,414 $1,000 $500 $500
Interest expense (A) 120 85 43 43
Interest expense (B) 134 95 48 48
Interest expense (C) 106 75 38 38
- The borrowings bear interest at the bank's prime rate plus 1/2% for
the line of credit.
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- The interest expense shown for line (A) is based upon the actual
bank's prime rate at December 31, 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 7.50%.
Forward Looking Statements
-----------------------------------------
All statements other than historical statements contained in this Report on Form
10-Q constitute "forward looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995. Without limitation, these forward
looking statements include statements regarding new products to be introduced by
the Company in the future, statements about the Company's business strategy and
plans, statements about the adequacy of the Company's working capital and other
financial resources, and in general statements herein that are not of a
historical nature. Any Form 10-K, Annual and Quarterly Reports to Shareholders,
Form 10-Q, Form 8-K or press release of the Company may include forward looking
statements. In addition, other written or oral statements which constitute
forward looking statements have been made or may in the future be made by the
Company, including statements regarding future operating performance, short- and
long-term revenue and earnings estimates, backlog, the status of litigation, the
value of new contract signings, and industry growth rates and the Company's
performance relative thereto. These forward-looking statements rely on a number
of assumptions concerning future events, and are subject to a number of
uncertainties and other factors, many of which are outside of the Company's
control, that could cause actual results to differ materially from such
statements. These include, but are not limited to: risks associated with recent
operating losses, no assurance of profitability, the need to increase sales,
liquidity deficiency and, in general, the other risk factors set forth in the
Company's Annual Report on Form 10-K/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.
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PART II. OTHER INFORMATION
------------------------------------
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
--------------------------------------------------------------------------------
c) Information regarding issuances of equity securities not registered under
the Securities Act of 1933 is incorporated by reference from Notes 4 and 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 Certificate of Designations, Preferences and Rights of Series B
Preferred Stock, filed January 31, 2000 (incorporated herein by
reference to Exhibit 4.2 of Registrant's Form 8-K filed on February
14, 2000).
27 Financial Data Schedule
b) Reports on form 8-K:
(1) A Form 8-K dated November 18, 1999 was filed by the Company on
December 1, 1999; reporting the termination of the SEC's previously
disclosed staff inquiry, under Item 5, Other Events.
(2) A Form 8-K dated October 27, 1999 was filed by the Company on November
12, 1999, reporting the completion of the sale of the Company's
approximately 80% membership interest in Coyote Gateway to AGTI on
October 27, 1999, pursuant to a Purchase Agreement dated September 30,
1999, under Item 2, Acquisitions or Dispositions of Assets, and Item
7, Financial Statements and Exhibits
(3) A Form 8-K/A dated October 27, 1999 was filed by the Company on
January 10, 2000, amending the Form 8-K filed on November 12, 1999 to
include pro forma financial information under Item 7, Financial
Statements and Exhibits.
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SIGNATURES
-------------------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
COYOTE NETWORK SYSTEMS, INC.
DATE: 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)
17
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