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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 June 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.
(Exact name of registrant as specified in its charter)
Delaware 36-2448698
--------------------------------- -----------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
1640 South Sepulveda Boulevard, Suite 320, Los Angeles, California 90025
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(Address of principal executive offices) (Zip Code)
(800) 935-8506
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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 July 12, 2000, the Registrant had issued and outstanding an aggregate of
17,430,451 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
Statements of Operations................................ 2
Statements of Cash Flows................................ 3
Notes to Financial Statements........................... 4
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations................... 14
Item 3. Quantitative and Qualitative Disclosures About
Market Risk........................................... 18
PART II. OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds............... 20
Item 6. Exhibits and Reports on Form 8-K........................ 20
Signatures ........................................................ 21
i
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
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COYOTE NETWORK SYSTEMS, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(In Thousands)
<TABLE>
<CAPTION>
June 30, 1999 March 31, 1999
Assets (Unaudited)
Current assets:
<S> <C> <C>
Cash and cash equivalents $ 1,344 $ 1,225
Receivables, net of allowance of $160 at June 30, 1999 and
Notes receivable - current 2,367 2,367
Deposits and other current assets 4,601 4,321
Net current assets of discontinued operations 4,343 5,046
---------- ---------
Total current assets 15,096 15,461
Property and equipment, net 6,423 5,430
Intangible assets, net 2,297 2,303
Net long term assets of discontinued operations 7,857 7,917
Notes receivable - non-current 905 871
Investments 1,550 1,550
Other assets 620 619
---------- ---------
$ 34,748 $ 34,151
========== =========
Liabilities and Shareholders' Equity
Current liabilities:
Lines of credit $ 777 $ 1,133
Accounts payable 8,149 8,160
Other accrued liabilities 3,066 4,101
Deferred revenue and customer deposits 260 1,410
Current portion of long-term debt and capital lease obligations 1,147 1,316
---------- ---------
Total current liabilities 13,399 16,120
Notes payable 9,049 8,183
Long-term debt 1,464 1,534
Capital lease obligations 1,785 1,817
Other liabilities 422 440
Commitments and contingencies
Shareholders' equity:
Preferred stock - $.01 par value: authorized 5,000,000 shares;
issued 600 and 700 shares in 2000 and 1999, respectively,
Common stock - $1 par value: authorized 30,000,000 shares,
issued 13,290,042 and 11,167,456 shares in 2000 and 1999, respectively 13,290 11,167
Additional paid-in capital 113,257 109,254
Accumulated deficit (119,756) (116,002)
Treasury stock at cost (5,757) (5,757)
----------- ----------
Total shareholders' equity 8,629 6,057
---------- ---------
$ 34,748 $ 34,151
========== =========
</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
---------------------------------
June 30, 1999 June 30, 1998
------------- -------------
<S> <C> <C>
Net sales $ 1,860 $ 128
Cost of goods sold 1,413 162
--------- ---------
Gross profit (loss) 447 (34)
Selling and administrative expenses 2,456 1,091
--------- ---------
Operating loss (2,009) (1,125)
Interest expense (352) (15)
Other non-operating income (expense) 184 (159)
--------- ---------
Loss from continuing operations (2,177) (1,299)
Income (loss) from discontinued operations (1,498) 221
---------- ---------
Net loss $ (3,675) $ (1,078)
========== ==========
Preferred stock dividends $ (79) $ ---
Net loss (3,675) (1,078)
---------- ----------
Loss applicable to common shareholders $ (3,754) $ (1,078)
========== ==========
Income (loss) per common share (basic & diluted):
Continuing operations $ (.20) $ (.14)
Discontinued operations (.14) .03
---------- --------
Net loss per common share (basic & diluted) $ (.34) $ (.11)
========== =========
Weighted average number of common shares outstanding
- basic & diluted 11,207 9,467
========= =========
</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>
3 MONTHS ENDED
----------------------------------
Operating activities: June 30, 1999 June 30, 1998
------------- -------------
<S> <C> <C>
Net loss $ (3,675) $ (1,078)
Adjustments to reconcile loss to net cash provided (used) by operating
activities:
Depreciation and amortization 211 90
Compensation expense relating to stock options and warrants 100 ---
Other (79) ---
Net change in discontinued operations (1,750) 613
Changes in current assets and liabilities 170 1,242
---------- ----------
Net cash provided (used) by operating activities (5,023) 867
----------- ----------
Investing activities:
Purchases of property and equipment (1,198) (266)
Proceeds from sales of marketable securities --- 16
Change in notes receivable (34) 340
Net change in discontinued operations (91) (508)
---------- -----------
Net cash used by investing activities (1,323) (418)
----------- -----------
Financing activities:
Repayments of long-term debt and capital lease obligations (271) (71)
Common stock issued, net of expenses 10,226 300
Redemption of preferred stock (4,000) ---
Increase in notes payable 866 590
Decrease in borrowing on line of credit (356) ---
----------- ---------
Net cash provided by financing activities 6,465 819
---------- ----------
Increase in cash and cash equivalents 119 1,268
Cash and cash equivalents:
At beginning of the period 1,225 3,746
---------- ----------
At end of the period $ 1,344 $ 5,014
========== ==========
Non-cash transactions:
Conversion of convertible notes and interest into common stock $ --- $ 3,407
Preferred stock conversion inducement 200 ---
</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
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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 June 30, 1999, are not necessarily
indicative of results for the fiscal year ended 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 and annual report on Form 10-K for the fiscal year
ended March 31, 2000.
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>
June 30, 1999 March 31, 1999
------------- --------------
(Unaudited)
Current assets:
<S> <C> <C>
Accounts receivable $ 1,387 $ 3,390
Inventory 3,542 2,130
Accrued liabilities (586) (474)
--------- ---------
Net current assets of discontinued operations $ 4,343 $ 5,046
======== ========
Property and equipment, net $ 2,651 $ 2,763
Capitalized software development and intellectual rights 5,206 4,920
-------- --------
Net long-term assets of discontinued operations $ 7,857 $ 7,683
======== ========
</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. The Company recorded a charge for estimated loss on disposal of the
switch business of approximately $11.0 million in the fourth quarter of 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 near the end of the second quarter of fiscal 2001.
4
<PAGE>
The Company has reflected certain reclassifications to net sales as previously
reported to reflect the deferral of revenue (1) for shipments to non-credit
worthy customers which were previously recorded as revenue upon shipment and (2)
for the contingencies discussed in revenue recognition in Note 1 in the March
31, 2000 Form 10-K. These reclassifications reduced sales and cost of sales by
equal amounts and did not affect net income, as the margins were fully reserved
for upon shipment. All non-credit worthy customers who received shipments during
the first three quarters of fiscal 1999 and fiscal 2000, obtained third party
lease financing prior to the end of the respective fiscal year except for
shipments totaling approximately $650,000 in fiscal 2000. Warrants given as
incentives to third party leasing companies are presented as reductions of net
sales. The operating results relating to the above discontinued segments are as
follows (dollars in thousands):
<TABLE>
<CAPTION>
3 Months Ended
-------------------------------
(Unaudited)
June 30, 1999 June 30, 1998
------------- -------------
<S> <C> <C>
Net sales - previously reported $ 8,546 $ 7,065
======== =======
Net sales - revised $ 2,646 $ 7,065
======== =======
Income (loss) from discontinued operations $ (1,188) $ 221
========= =======
</TABLE>
After the decision to discontinue the switch business, the Company is 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.
Prior to the sale of the land and buildings in July 1999, additional expenses of
$314,000 were incurred related to property taxes. $310,000 of these costs are
5
<PAGE>
included in the loss from discontinued operations in the condensed consolidated
statement of operations for the three months ended June 30, 1999 and a further
$4,000 was incurred and charged in the quarter ended September 30, 1999.
NOTE 3 ACQUISITIONS
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In December 1997, the Company entered into a letter of intent regarding a merger
with NUKO Information Systems, Inc. ("NUKO"). NUKO is a manufacturer of
compression and transmission technology for a variety of video applications. The
Company subsequently was unable to reach agreement with NUKO on the transaction
and withdrew its offer in March 1998. During negotiations, and in accordance
with the terms of the letter of intent, the Company advanced funds to support
NUKO's ongoing activity. Including the interest, the total funding advanced to
NUKO and owed to the Company of $1.9 million was secured by a pledge to the
Company of shares of stock owned by NUKO in iCompression, Inc. (fka, Internext
Compression, Inc.). In April 1998, NUKO filed a voluntary petition under Chapter
11 of the U.S. Bankruptcy Code. In May 1999, the Company received an offer to
purchase the collateral for a total price of $1.9 million. The Company accepted
this offer subject to NUKO's right of first offer to purchase the shares. This
amount is included in notes receivable - current in the accompanying balance
sheet. In July 1999, the Company received $1.9 million from the sale of the
collateral, which provided full recovery of the principal and interest owed on
the loans.
NOTE 4 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"). As specified in the
Purchase Agreement, the sale was effective on September 30, 1999 and AGTI
established 100% control of the business as of that date.
The book value of AGT's assets and liabilities as at September 30, 1999 was as
follows (dollars in thousands):
<TABLE>
<CAPTION>
Current assets
<S> <C>
Cash and cash equivalents $ 80
Receivables 389
Prepaid and other current assets 3,471
---------
Total current assets 3,940
Property and equipment, net 1,294
Intangible assets, net 116
---------
Total assets $ 5,350
=========
Current liabilities
Accounts payable $ 969
Other accrued liabilities 339
---------
Total current liabilities 1,308
Notes payable 10,251
Members equity (deficit)
Capital contributed 795
Accumulated deficit (7,004)
----------
Total equity (deficit) (6,209)
----------
$ 5,350
</TABLE>
6
<PAGE>
In consideration for the Sale, the Company is entitled to 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 remained directly liable for its $10.2 million credit
facility (the "Credit Facility") with Prinvest, whose affiliate owns 53.75% of
AGTI. The Company has been relieved of its obligations under its pledge
agreement with Prinvest which secured the Credit Facility and, in connection
therewith, Prinvest has returned 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 is no
longer required to reflect the Credit Facility on its consolidated financial
statements and, accordingly, the Company recognized a gain of $6,209,000 from
the Sale in the second quarter of fiscal 2000. 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 will receive a fifty percent
purchase discount on all Company-manufactured switches it purchases from the
Company during this time period. As of July 10, 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 5 SHAREHOLDERS' EQUITY
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Common Stock and Convertible Preferred Stock
--------------------------------------------
On May 27, 1999, the Company sold, pursuant to Rule 506 under Regulation D,
1,767,000 shares of common stock at $6.00 per share in a private placement with
new and existing domestic and international institutional investors. The
placement agent received cash commissions of $352,000 and commissions in the
form of common stock aggregating 131,148 shares and five-year warrants to
purchase 176,700 shares at $6.00 per share. Of the net proceeds of approximately
$10.2 million, $4.0 million were used to redeem a portion of the outstanding
Convertible Preferred Stock and the balance is to be used for working capital.
In connection with this redemption, the conversion price of the remaining $6
million of Convertible Preferred Stock was fixed at $6.00 per share pursuant to
Section 4(2) of the Securities Act and the Company issued the holder of the
Convertible Preferred Stock 18-month warrants to purchase 325,000 shares of
common stock at $6.00 per share with a Black-Scholes fair market value of $1.3
million. These warrants may be exercised at any time until December 30, 2000.
The excess of the amount given over the fair value of the shares immediately
prior to the inducement was $200,000. The excess has been added to Preferred
Stock.
On July 15, 1999, the Company filed a registration statement as to the common
stock issued in the private placement and underlying the warrants and
Convertible Preferred Stock referred to above.
Options and Warrants
--------------------
During the quarter ended June 30, 1999, the Board of Directors granted five-year
options to purchase a total of 664,582 shares of the Company's common stock to
certain executives, employees and non-employee directors. The per share exercise
7
<PAGE>
price of these grants are equal to the closing market price of the Company's
common stock on the grant date and range from $4.40 to $7.50. These options vest
in one-third increments over three years.
In June 1999, Mr. James J. Fiedler, the Company's former Chairman and Chief
Executive Officer, converted 350 Class B Units into 192,938 shares of Company
common stock in accordance with the terms of conversion available to the holder.
In July 1999, Mr. Daniel W. Latham, the Company's President and Chief Operating
Officer, converted 38 Class B Units into 21,000 shares of Company common stock
in accordance with the terms of conversion available to the holder.
In June 1999, a warrant holder exercised such warrants to acquire 31,500 shares
of Company common stock at an exercise price of $2.86 per share.
NOTE 6 RELATED PARTY TRANSACTIONS
--------------------------------------------------------------------------------
In June 1999 Mr. Fiedler, the Company's former Chairman and Chief Executive
Officer, and Mr. Latham, the Company's President and Chief Operating Officer,
converted, respectively, 350 and 38 Class B Units into 192,938 and 21,000 shares
of Company common stock. These conversions were made in accordance with the
conversion terms available to holders of Class B Units.
In July 1999, the Company received an offer for a commitment for a stand-by
credit facility from certain shareholders that would provide a funding
commitment to the Company 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. This commitment has
expired.
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 September, 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, a
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, a shareholder of the Company, in the amount of $500,000,
by Mr. Alan J. Andreini in the amount of $225,000 and by three other
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
8
<PAGE>
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 resulted in a non-cash interest expense charge of $0.3 million
recognized in the fourth quarter of fiscal 2000.
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.
In January 2000, the Company restructured its management and business strategy.
On January 14, 2000 the Company issued options to Mr. James R. McCullough, the
Company's Chief Executive Officer and a director, 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.
On January 26, 2000, the Company 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. As
compensation for services KRJ provided to the Company on or prior to January 26,
2000, the Company issued to KRJ 2,000,000 shares of common stock. These shares
are non-forfeitable. Of such shares, 1,250,000 were placed 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 March 2000, 416,000
shares were released from escrow as one of the common stock price targets was
met and sustained. In addition, unless there is a change of control of the
Company (as defined in the Consulting Agreement), KRJ 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.
The Company waived this restriction in connection with certain share transfers
made in March and April 2000 by KRJ. Mr. McCullough has an approximately
one-third interest in KRJ and the balance of KRJ is owned by affiliates of First
Venture Leasing, LLC ("First Venture"). First Venture is an entity in which Mr.
James McCullough, the Company's Chief Executive Officer and a director, had a
25% equity interest, which he relinquished effective upon his election to the
Company's Board of Directors on February 2, 2000. 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 recorded a one-time, non-cash charge to earnings of approximately $12.6
million in the fourth quarter of fiscal 2000.
The Company and its subsidiary, Coyote Technologies, LLC, entered into a
Financial Services Agreement, dated as of January 25, 2000 and amended on
February 2, 2000, with First Venture and Coyote Leasing, LLC pursuant to which
Coyote Leasing would be the Company's and Coyote Technologies' preferred but
nonexclusive source for offering certain leasing and credit packages to their
customers.
9
<PAGE>
In connection with the Financial Services Agreement, on January 26, 2000, the
Company and Coyote Technologies entered into a Remarketing Agreement with Coyote
Leasing. Under the Remarketing Agreement, Coyote Leasing appointed the Company
and Coyote Technologies as its agent to remarket Coyote Leasing's equipment, on
a non-priority basis, upon termination of its leases of such equipment to end
users. All costs of refurbishing and updating the equipment would be paid by
Coyote Leasing. In addition, all actual selling costs, including but not limited
to installation, de-installation, sales commissions, brokerage fees,
transportation, storage, insurance and legal fees must be paid to Coyote
Technologies out of the first proceeds of any sale. Coyote Leasing also agreed
to pay Coyote Technologies a remarketing fee of 25% of the proceeds remaining
after payment or credit to Coyote Leasing of any amounts due but unpaid under
user leases and reimbursement of its actual costs.
On January 26, 2000, the Company and Coyote Technologies each also entered into
a License Agreement with Coyote Leasing, pursuant to which each granted Coyote
Leasing an exclusive, perpetual, sublicensable, worldwide, royalty-free right
and license to use certain trademarks, service marks, trade names and other
designations in connection with the services to be provided by Coyote Leasing
under the Financial Services Agreement.
On March 31, 2000, the Company and Coyote Technologies entered into a new
Financial Services Agreement with First Venture, which terminated the January
Financial Services Agreement, Remarketing Agreement and License Agreements.
Under the new Financial Services Agreement, First Venture committed to fully
fund leases, without any holdbacks, for customers in the amount of at least $50
million during calendar year 2000. First Venture also agreed to use its best
efforts to originate leases for products with a value of at least $50 million
during 2000. Coyote Technologies agreed to provide, upon First Venture's request
prior to funding a customer, a guaranty of customer lease payments in the form
of cash or a letter of credit to First Venture in an amount not less than 10% of
the value of the products leased.
As partial consideration for First Venture's commitment to fund at least $50
million in leases for the Company and to purchase $14.27 million of accounts
receivable of Coyote Technologies, the Company issued to First Venture warrants
to purchase 620,000 shares and 261,600 shares of common stock at $5.00 and
$7.35, respectively, per share. The closing price of the Company's common stock
at the date of grant, March 31, 2000, was $11.00. The warrants were vested upon
grant, are non-forfeitable and have a three-year term. Accordingly, based upon
the measurement date of March 31, 2000, the Company recorded a fair value of the
warrants of $6,673,000 using the Black Scholes option pricing model. Assumptions
utilized in the model were:
Stock price $11.00
Term 3 years
Exercise prices $5.00 and $7.35
Volatility 101.5%
Discount rate 5.95%
Illiquidity discount 10%
This amount was classified as a reduction of the discontinued switch equipment
sales in the fourth quarter of fiscal 2000 and reflected in the loss on
discontinued operations.
First Venture paid the Company cash in the amounts of $10.0 million in March and
$1.5 million in April for the accounts receivable, with the remaining balance of
10
<PAGE>
$2.77 million held back as a cash guaranty of such receivables. Such balance
will be due and payable to the Company based upon the performance of the leases
to which the receivables relate and therefore has not been recorded as revenue.
Also on March 31, 2000, Coyote Technologies entered into a new Remarketing
Agreement with First Venture. Under the new Remarketing Agreement, First Venture
appointed Coyote Technologies as its exclusive remarketing agent. Coyote
Technologies agreed to perform the remarketing services on a non-priority basis.
All costs of refurbishing and updating the equipment will be paid by First
Venture. In addition, all actual selling costs, including but not limited to
installation, de-installation, sales commissions, brokerage fees,
transportation, storage, insurance and legal fees must be paid to Coyote
Technologies out of the first proceeds of any sale. The balance of the proceeds
will be paid to First Venture.
The terms of the agreements with First Venture and Coyote Leasing were the
result of arms' length negotiations in which Mr. McCullough did not participate.
The agreements with First Venture and Coyote Leasing were approved by the
Company's Board of Directors.
See Note 8, Paragraph 3 regarding a repricing of options held by Messrs. Fiedler
and Latham.
In June 2000 in consideration of additional services provided under the
consulting agreement with KRJ, the Company's Board of Directors resolved to
present for shareholder approval the issuance of 2,500,000 shares of common
stock and the grant of warrants to purchase 2,400,000 shares of common stock at
an exercise price per share of $7.00. The vesting of the shares and the
exercisability of the warrants would be dependent on the average bid price of
our common stock exceeding certain amounts that range from $12 to $30 per share.
The Company will determine the charge to earnings, if any, if and when
shareholder approval is obtained.
In June 2000 the Board of Directors approved the grant of options to purchase an
additional 750,000 shares of Common Stock to James McCullough, CEO at $7.00 per
share. The exercisability of the options is dependent on the closing bid price
of the Company's Common Stock exceeding certain amounts ranging from $12.00 to
$20.00 per share. All options will vest if Mr. McCullough is terminated without
cause or there is a change in control of the Company (other than as a result of
the HomeAccess Merger described in Note 8, paragraph 7).
NOTE 7 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
anti-dilutive. 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.
11
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NOTE 8 SUBSEQUENT EVENTS
--------------------------------------------------------------------------------
In addition to the subsequent events discussed elsewhere, the following events
have occurred subsequent to June 30, 1999:
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 entered into a private placement
agreement and sold 3,157,895 shares of 6% Series B Preferred Stock, par
value $1.00, with a liquidation value of $4.75 per share. Total cash
received by the Company was $14,142,000 after payment of $858,000 in fees
and expenses associated with the sale. Sunrise Securities Corp., the
placement agent, received a commission equal to 7% of the gross proceeds of
the sale, consisting of $718,500 cash and 75,000 shares of common stock,
plus reimbursement for expenses. The Preferred Stock has no voting rights.
At their option, and at any time, the holders may convert any shares of
Series B Preferred Stock into shares of common stock at a conversion price
of $4.75 per share. Based upon the market value of the common stock
(weighted average value of $8.99 per share) on the dates of the issuances
of the Series B Convertible Preferred Stock, the conversion price of $4.75
per share represented a discount from market of approximately $4.24 per
share. As a result of this discount from market, the Company recorded a
beneficial conversion feature of $13,388,000 which has been accounted for
as a dividend to preferred shareholders recorded in the fourth quarter of
fiscal 2000. The holders are entitled to receive 6% cumulative dividends
per year commencing 90 days from the date of the original issue. However,
such dividends will not be paid until all amounts then due to the holders
of Series A Preferred Stock have been paid. No dividends can be paid or
declared on any common stock unless full cash dividends, including past
dividends declared, have been paid on the Preferred Stock. At any time
after the trading price of the Common Stock equals or exceeds $10 for
twenty consecutive trading days, the Company may, at its option, redeem all
or any portion of the shares of Series B Preferred Stock then outstanding
at $4.75 per share, plus any declared and unpaid dividends.
3. In January 2000, the Board of Directors approved a re-pricing of options to
purchase 94,500 shares each awarded to Mr. Fiedler and Mr. Latham from an
exercise price of $6.969 per share to $5.00 per share. The awards are
subject to shareholder approval of the Company's 2000 Equity Incentive Plan
at the annual meeting of stockholders. Upon approval, a charge will be
recorded in general and administrative expense if, and to the extent that
the market price on the date of stockholder approval (the measurement date)
exceeds the new exercise price of $5.00 per share.
4. 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 $0.4
million was recorded in the fourth quarter of fiscal 2000.
5. On April 30, 2000, the Company purchased certain assets, consisting of a
customer base of approximately 4,000 residential and small business long
distance customers (the "Matrix Base") from Group Long Distance, Inc., or
GLDI, a non-facilities based reseller of long distance services to more
than 15,000 small and medium-sized businesses and residential customers.
12
<PAGE>
The Company paid the purchase price for the Matrix Base with $50,000 in
cash and a promissory note in the principal amount of $950,000 bearing
interest at 8%, payable monthly, maturing April 30, 2002, secured by the
assets sold. On May 1, 2000, the Company entered into a Merger Agreement
with GLDI pursuant to which a subsidiary of the Company would merge into
GLDI. The Company will issue 750,000 shares of the Company's common stock
(subject to adjustment based upon the trading price of the common stock
prior to closing) to GLDI's shareholders upon the consummation of the
merger. The merger is subject to certain closing conditions, including
approval of the GLDI shareholders and effectiveness of a registration
statement registering the 750,000 shares to be issued.
6. 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.)
7. On May 10, 2000, the Company entered into an Agreement and Plan of Merger,
subsequently amended on May 26, 2000 (the "Merger Agreement"), under which
the Company agreed to acquire Primary Knowledge, Inc., a California
corporation in the process of changing its name to HomeAccess MicroWeb,
Inc. ("HomeAccess"). HomeAccess is a developer of local community on-line
exchange services that are expected to enable customers to select, order
and pay for products and services on-line from local merchants using
personal computers or less expensive screen phones. Upon consummation of
the merger, the Company has agreed to issue 1,384,178 shares of Series C
Preferred Stock and between 3,229,747 and 4,556,250 shares of Common Stock
(dependent upon the price of the Common Stock on the closing date) to the
stockholders of HomeAccess. The shares of Series C Preferred Stock are
convertible into between 1,952,679 and 1,384,178 shares of Common Stock,
dependent upon the price of the Common Stock on the closing date. For a
period of four years after consummation of the merger, the Company has
agreed to issue to the shareholders of HomeAccess, collectively, two shares
of Common Stock for each new customer acquired by HomeAccess; provided the
customer has been preapproved by the Company and has met certain
performance criteria. In no event will the maximum number of shares issued
under this program exceed 13% of the total number of shares of Common Stock
outstanding, on a fully diluted basis, on the closing date. The Company has
also agreed to issue a warrant to purchase up to 3,600,000 shares of Common
Stock at an exercise price of $20 per share if certain performance criteria
are met. The consummation of the transactions contemplated by the Merger
Agreement are subject to certain contingencies, including stockholder
approval.
8. The Company entered into a letter of intent effective May 6, 2000 to
acquire Ariana, Inc., an international and domestic long distance carrier,
through the issuance of 441,175 shares of Common Stock. The Company could
issue additional shares of Common Stock valued at up to $3.0 million if
earn-out targets are met.
9. The Company entered into Stock Purchase Agreements dated June 1, 2000 to
acquire PolyLink Gateway International, and PolyLink Development, Ltd., two
Hong Kong based telecommunications providers under common ownership, for an
aggregate of 258,064 shares of Common Stock and a $250,000 cash payment,
plus an additional cash payment of $250,000 if an earn-out event occurs.
10. See Note 5 regarding the Financial Services and Remarketing Agreements the
Company entered into with First Venture, First Venture's purchase of $14.27
million of the Company's accounts receivable and the issuance of warrants
to First Venture.
11. See Note 5 regarding 2,000,000 shares issued to KRJ, LLC and the $12.6
million charge taken in connection therewith and Board approval to present
for a vote of the Company's stockholders an additional 2,500,000 shares and
warrants to purchase 2,400,000 shares.
13
<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. We recorded a charge for estimated loss on disposal of the switch
business of approximately $11.0 million in the fourth quarter of fiscal 2000,
which includes an estimated $3.0 million of expected losses of the segment for
the first two quarters of fiscal 2001. We expect to dispose of the segment near
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 three months ended June 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 effective September 1999; and INET,
which was acquired in September 1998.
Three Months Ended June 30, 1999 versus Three Months Ended June 30, 1998
------------------------------------------------------------------------
The continuing operations of the two international long distance service
subsidiaries that were acquired during fiscal 1999 generated revenues of $1.9
million in the first quarter of fiscal 2000 compared to $0.1 million for the
first quarter of fiscal 1999, an increase of $1.8 million. This increase was
primarily due to revenues of INET of $1.8 million in the first quarter of fiscal
2000, which was not acquired until the third quarter of fiscal 1999. Revenues of
AGT were $0.08 million and $0.13 million in the three months ended June 30, 1999
and 1998, respectively.
Cost of sales for the first quarter of fiscal 2000 were $1.4 million, compared
to $0.2 million for fiscal 1999, an increase of $1.2 million. The increase
primarily results from the costs applicable to the INET revenues. Cost of sale
for AGT increased to $0.19 million in the first quarter of fiscal 2000 from
$0.16 million in the first quarter of fiscal 1999.
14
<PAGE>
Gross profit on the continuing long distance services was $0.4 million for the
first quarter of fiscal 2000, compared to a gross loss of $0.03 million in
fiscal 1999. The improvement in gross profit was primarily due to more
profitable revenues generated by INET. Gross loss attributable to AGT was $0.11
million in the first quarter of fiscal 2000 compared to a gross loss of $0.03
million in the first quarter of fiscal 1999.
Selling and administrative expenses of the continuing operations for the first
quarter of fiscal 2000 were $2.5 million, compared to $1.1 million for the first
quarter of fiscal 1999, an increase of $1.4 million, or 125%. This increase was
primarily related to the expenses of the recently acquired INET subsidiary.
Selling and administrative expenses as a percentage of revenues for the first
quarter of fiscal 2000 were 132% in the first quarter of fiscal 2000, compared
to 852% for the first quarter of fiscal 1999. Selling and administrative
expenses for AGT, as a percentage of its revenues were 532% in the first quarter
of fiscal 2000 compared to 126% in the first quarter of fiscal 1999.
The operating loss for the first quarter of fiscal 2000 was $2.0 million,
compared to $1.1 million in the first quarter of fiscal 1999, an increase of
$0.9 million, or 78%. This increase was primarily due to increases in selling
and administrative expenses described above.
Interest expense for the first quarter of fiscal 2000 was $0.4 million, compared
to $0.02 million for the first quarter of fiscal 1999. The increased expense
resulted primarily from an increase of $0.9 million in notes payable.
Loss from continuing operations for the first quarter of fiscal 2000 was $2.2
million, compared to $1.3 million for the first quarter of fiscal 1999, an
increase of $0.9 million, or 68%. The increase resulted primarily from increased
selling and administrative expenses partially offset by the improvement in gross
profit.
The loss from discontinued operations for the first quarter of fiscal year 2000
was $1.5 million, compared to income of $0.2 million in the first quarter of
fiscal 1999. This change was primarily due to decreases in revenues of $4.4
million for the period, resulting from a lack of orders received from credit
worthy customers. The decrease in demand for our circuit-based switch product is
partly due to our customers' demand for a product that has an integrated
Internet Protocol, which the customers view as more competitively priced. Demand
has also been limited by reductions in the international long distance rates
which have reduced the potential profitability of small and medium sized
carriers and hindered their ability to readily obtain third party lease
financing. During the three months ended June 30, 1999, we shipped switching
equipment valued at $7.5 million to customers who were in the process of
obtaining third party lease financing. These customers agreed to pay for the
equipment pursuant to promissory notes payable over three years, secured by the
equipment. Because these customers are not considered credit worthy, these sales
will not be recognized until the customers obtain lease financing or payments
are received pursuant to the notes. Revenues of $5.3 million for the quarter
ended March 31, 2000 are attributable to these customers obtaining lease
financing and for which we received payment in March and April 2000. During the
three months ended June 30, 1999, we recognized $1.6 million related to
contingency payments received during the current quarter for installations of
switch equipment shipped in prior quarters.
15
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Liquidity and Capital Resources
--------------------------------
As of June 30, 1999, we had working capital of $1.7 million.
During the first three months of fiscal 2000 we used $5.0 million for operating
activities compared to generating $0.9 million during the first three 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 $1.3 million during the first three
months of fiscal 2000 compared to net cash used for investing activities of $0.4
million in the corresponding period of fiscal 1999. Capital expenditures on
equipment purchases of $1.2 million in the first three months of fiscal 2000
represented an increase of $0.9 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. Investment expenditures on discontinued operations comprised of
capital expenditures on equipment and software were $0.1 million for the first
three months of fiscal 2000 compared to $0.5 million in the prior year. Notes
receivable increased by $0.03 million in the first three months of fiscal 2000
compared to a reduction of $0.3 million in the prior year when payments were
received from notes related to the sale of C&L Communications, our former
subsidiary.
Net cash provided by financing activities for the first three months of fiscal
2000 was $6.5 million, compared to $0.8 million for the corresponding period of
fiscal 1999. This increase of $5.6 million results primarily from the net
proceeds of a private placement of common stock in May 1999 of $10.2 million, an
increase of $0.9 million in notes payable offset by a $4.0 million cost of
redemption of 100 shares of Series A Preference Shares and debt reductions of
$0.6 million.
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. This commitment has expired.
During the second and third quarters of fiscal 2000, we completed and received
funding under a series of two demand loans. The first loan for a total amount of
$600,000 was provided to us by Mr. James J. Fiedler, our former Chairman and
Chief Executive Officer, in the amount of $175,000, by Mr. Daniel W. Latham, our
President, Chief Operating Officer and a director, in the amount of $75,000 and
by Mr. Alan J. Andreini, our shareholder, 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 our
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, our shareholder, in the amount of $500,000, by Mr. Alan
J. Andreini in the amount of $225,000 and by three other 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., our wholly owned subsidiary. Under the
16
<PAGE>
terms of this loan, the lenders were granted, pro-rata, a combined total of
73,500 three-year warrants to purchase shares of our common stock at an exercise
price of $4.50 per share. The warrants resulted in a non-cash interest expense
charge of $0.3 million recognized in the fourth quarter of fiscal 2000.
Of the above funding, $475,000 was received by us during the quarter ended
September 30, 1999 and $1,350,000 was received by us during October and November
1999. These borrowings together with the accrued interest were fully repaid in
February and April 2000.
As of June 30, 1999, our subsidiary, AGT, had notes payable of $9.0 million.
These notes were secured by certain of AGT's assets and by pledge of 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 our
subsidiary, AGT, the buyer of AGT assumed these notes and the pledge of our
common stock was terminated.
We had capital lease obligations of $2.8 million at June 30, 1999 payable
through 2004.
We have a $2.2 million revolving line of credit secured against certain trade
receivables. As at June 30, 1999, $0.8 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 June 30, 1999) plus 4%. The
line of credit expires on August 31, 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 January 2002 and interest only is due
until such time.
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 $14.1 million, net of
fees and expenses of $858,000 associated with the placements. Sunrise Securities
Corp., the placement agent, received a commission equal to 7% of the gross
proceeds of the sale, consisting of $718,500 cash and 75,000 shares of common
stock, plus reimbursement for expenses. The Preferred Stock has no voting
rights. At their option, and at any time, the holders may convert any shares of
Series B Preferred Stock into shares of common stock at a conversion price of
$4.75 per share. As a result of this discount from market of approximately $4.24
per share, we recorded a beneficial conversion feature of $13,388,000 which has
been accounted for as a dividend to preferred shareholders recorded in the
fourth quarter of fiscal 2000. The holders are entitled to receive 6% cumulative
dividends per year commencing 90 days from the date of the original issue.
However, such dividends shall not be paid until all amounts then due to the
holders of Series A Preferred Stock have been paid. No dividends can be paid or
declared on any common stock unless full cash dividends, including past
dividends declared, have been paid on the Preferred Stock. At any time after the
trading price of the Common Stock equals or exceeds $10 for twenty consecutive
trading days, we may, at our option, redeem all or any portion of the shares of
Series B Preferred Stock then outstanding at $4.75 per share, plus any declared
and unpaid dividends.
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 was recorded in the fourth quarter of fiscal 2000.
17
<PAGE>
In March 2000, four of our customers completed third party lease contracts with
First Venture in respect of $14.3 million of switching equipment previously sold
under three year promissory notes secured by the equipment. In March and April
2000, we received payments of $10.0 and $1.5 million, respectively. We expect to
receive the remaining balance of $2.8 million if and when the lessees complete
their payment obligations to First Venture.
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.
The Company's primary market risk exposure is interest rate risk related to
borrowings under its 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 June 30
---------------------------
(U.S. Dollars - Thousands)
1999 2000 2001 2002
---- ---- ---- ----
Line of credit borrowings $777 $1,000 $5,000 $6,000
Interest expense (A) 68 88 438 525
Interest expense (B) 76 98 488 585
Interest expense (C) 60 78 388 465
- 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 June 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%.
18
<PAGE>
- 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%.
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
and Annual Report on Form 10-K for the fiscal year ended March 31, 2000. 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.
19
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PART II. OTHER INFORMATION
--------------------------------------------------------------------------------
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
c) Issuances of equity securities not registered under the Securities Act of
1933 are described in Note 5 of the Condensed Consolidated Financial
Statements and incorporated herein by reference.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
--------------------------------------------------------------------------------
a) Exhibits:
3.01 Restated Certificate of Incorporation (incorporated herein by
reference to Exhibit 3.01 of Registrant's Form 10-Q for the quarter
ended September 30, 1998 filed on November 16, 1998).
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).
3.03 Certificate of Designations, Preferences and Rights of Series B
Preferred Stock (incorporated herein by reference to Exhibit 4.2 of
Registrant's Form 8-K dated January 31, 2000 filed on February 14,
2000).
27 Financial Data Schedule
b) Reports on Form 8-K:
(1) A Form 8-K dated April 20, 1999 was filed by the Company on May 5,
1999, which reported under Item 5 the Company's cancellation of its
proposed acquisition of Apollo Telecom, Inc.
(2) A Form 8-K dated May 27, 1999 was filed by the Company on June 3,
1999, which reported under Item 5 that on May 27, 1999, the Company
sold, pursuant to Rule 506 under Regulation D, 1,767,000 shares of
common stock at $6.00 per share in a private placement with new and
existing domestic and international institutional investors.
(3) A Form 8-K/A dated May 27, 1999 was filed by the Company on June 18,
1999, which amended Item 7 of the Current Report on Form 8-K of Coyote
Network Systems, Inc. dated May 27, 1999, filed with the Securities
and Exchange Commission on June 3, 1999, to refile Exhibit 4.2. An
incorrect copy of such exhibit was filed on June 3, 1999.
(4) A Form 8-K/A, Amendment No. 2 was filed by the Company on June 22,
1999, which amended Item 7 of the Current Report on Form 8-K/A of
Coyote Network Systems, Inc. dated May 27, 1999, filed with the
Securities and Exchange Commission on June 18, 1999, to refile Exhibit
4.2. Such exhibit as filed June 18, 1999, incorrectly listed the title
of Mr. Daniel W. Latham. Mr. Latham's title was amended to correctly
read President and Chief Operating Officer of Coyote Network Systems,
Inc.
20
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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: July 19, 2000 By: /s/ James R. McCullough
-----------------------------------
James R. McCullough
Chief Executive Officer and Director
(Principal Executive Officer)
DATE: July 19, 2000
By: /s/ Cheryl Johnson
-----------------------------------
Cheryl Johnson
Controller
(Principal Financial and Accounting Officer)
21
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