<PAGE> 1
SCHEDULE 14A
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(a) OF THE
SECURITIES EXCHANGE ACT OF 1934
[X] Filed by the Registrant
[ ] Filed by a Party other than the Registrant
Check the appropriate box:
[ ] Preliminary Proxy Statement
[ ] Confidential, for Use of the Commission Only (as permitted by Rule
14a-6(c)(2))
[X] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to Section 240.14a-11(c) or Section 240.14a-12
COYOTE NETWORK SYSTEMS, INC.
--------------------------------------------------------------------------------
(Name of Registrant as Specified in its Charter)
COYOTE NETWORK SYSTEMS, INC.
--------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement)
Payment of Filing Fee (Check the appropriate box):
[X] No fee required.
[ ] Fee computed on table below per Exchange Act Rules 14a-6(I)(4) and 0-11.
(1) Title of each class of securities to which transaction applies:
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(2) Aggregate number of securities to which transaction applies:
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(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which the
filing fee is calculated and state how it was determined):
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(4) Proposed maximum aggregate value of transaction:
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(5) Total fee paid:
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[ ] Fee paid previously with preliminary materials.
[ ] Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number,
or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
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(2) Form, Schedule or Registration Statement No.:
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(3) Filing Party:
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(4) Date Filed:
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<PAGE> 2
COYOTE NETWORK SYSTEMS, INC.
1640 S. SEPULVEDA BLVD., SUITE 320
LOS ANGELES, CALIFORNIA 90025
(800) 935-8506
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
To the Stockholders of Coyote Network Systems, Inc.:
The Annual Meeting of Stockholders of Coyote Network Systems, Inc. (the
"Company") will be held at the Hilton Hotel LAX, 5711 West Century Blvd., Los
Angeles, CA 90045 at 11:00 a.m., Pacific Daylight Time, on July 27, 2000 for the
following purposes:
1. To elect one director for a three year term.
2. To authorize an amendment to the Company's Restated Certificate of
Incorporation to increase the authorized number of shares of capital
stock from 35,000,000 to 80,000,000, of which 70,000,000 will be
designated "Common Stock" and 10,000,000 will be designated "Preferred
Stock."
3. To consider and vote upon a proposal to adopt the Company's 2000 Equity
Incentive Plan.
4. To amend the Company's Restated Certificate of Incorporation to change
the name of the Company to Quentra Networks, Inc.
5. To ratify the appointment of Arthur Andersen, LLP as the independent
auditors and accountants for the Company for the year ending March 31,
2000.
6. To transact such other business as may properly come before the meeting.
All stockholders are invited to attend the meeting. Stockholders of record
at the close of business on June 19, 2000, the record date fixed by the Board of
Directors, are entitled to notice of and to vote at the meeting. A complete list
of stockholders entitled to notice of and vote at the meeting will be open to
examination by stockholders beginning ten days prior to the meeting for any
purpose germane to the meeting during normal business hours at the office of the
Secretary of the Company at 1640 S. Sepulveda Blvd., Suite 320, Los Angeles,
California 90025.
Whether or not you intend to be present at the meeting, please sign and
date the enclosed proxy and return it in the enclosed envelope.
By Order of the Board of Directors
/s/ TIMOTHY G. ATKINSON
Timothy G. Atkinson
Secretary
Los Angeles, California
June 30, 2000
<PAGE> 3
COYOTE NETWORK SYSTEMS, INC.
1640 S. SEPULVEDA BLVD., SUITE 320
LOS ANGELES, CALIFORNIA 90025
(800) 935-8506
------------------------
PROXY STATEMENT
------------------------
The accompanying proxy is solicited by the Board of Directors of Coyote
Network Systems, Inc. (the "Company") for use at the Annual Meeting of
Stockholders (the "Annual Meeting") to be held at 11:00 a.m., Pacific Daylight
Time, on July 27, 2000 at the Hilton Hotel LAX, 5711 West Century Blvd., Los
Angeles, CA 90045 and any adjournment thereof.
VOTING SECURITIES; PROXIES
The Company will bear the cost of solicitation of proxies. In addition to
the solicitation of proxies by mail, certain officers and employees of the
Company, without extra remuneration, may also solicit proxies personally by
telefax and by telephone. In addition to mailing copies of this material to
stockholders, the Company may request persons, and reimburse them for their
expenses in connection therewith, who hold stock in their names or custody or in
the names of nominees for others to forward such material to those persons for
whom they hold stock of the Company and to request their authority for execution
of the proxies.
The holders of a majority of the outstanding shares of Common Stock, par
value $1.00 per share (the "Common Stock"), present in person or represented by
proxy shall constitute a quorum at the Annual Meeting. The approval of a
plurality of the outstanding shares of Common Stock present in person or
represented by proxy at the Annual Meeting is required for the election of the
nominee as a director. The affirmative vote of the majority of the shares of
Common Stock outstanding and entitled to vote is required for the adoption of
Proposals 2 and 4. The affirmative vote of a majority of the shares of Common
Stock present in person or represented by proxy at the Annual Meeting is
required for the adoption of Proposals 3 and 5.
The form of proxy solicited by the Board of Directors affords stockholders
the ability to specify a choice among approval of, disapproval of, or abstention
with respect to each matter to be acted upon at the Annual Meeting. Shares of
Common Stock represented by the proxy will be voted, except as to matters with
respect to which authority to vote is specifically withheld. Where the solicited
stockholder indicates a choice on the form of proxy with respect to any matter
to be acted upon, the shares will be voted as specified. Abstentions and broker
non-votes will not have the effect of votes in opposition to a director. With
respect to Proposals 2 and 4, abstentions and broker non-votes are not
affirmative votes and, therefore, will have the same effect as votes against
Proposals 2 and 4. Broker non-votes are not entitled to vote on the approval of
Proposal 3 and, therefore, will not affect the outcome of the vote. Abstentions
will have the effect of a vote against Proposal 3. Uninstructed shares are
entitled to vote on Proposal 5. Therefore, abstentions or broker non-votes have
the effect of a vote against Proposal 5.
All shares of Common Stock represented by properly executed proxies which
are returned and not revoked will be voted in accordance with the instructions,
if any, given therein. If no instructions are provided in a proxy, the shares of
Common Stock represented by such proxy will be voted FOR the Board's nominee for
director, FOR the approval of Proposals 2, 3, 4 and 5 and in accordance with the
proxy-holder's best judgment as to any other matters raised at the Annual
Meeting.
A stockholder who has given a proxy may revoke it at any time prior to its
exercise by giving written notice of such revocation to the Secretary of the
Company, executing and delivering to the Company a later dated proxy reflecting
contrary instructions or appearing at the Annual Meeting and taking appropriate
steps to vote in person.
At the close of business on June 19, 2000, 17,430,451 shares of Common
Stock were outstanding and eligible for voting at the meeting. Each stockholder
of record is entitled to one vote for each share of Common
<PAGE> 4
Stock held on all matters that come before the Annual Meeting. Only stockholders
of record at the close of business on June 19, 2000 are entitled to notice of,
and to vote at, the Annual Meeting.
This proxy material is first being mailed to stockholders commencing on or
about June 30, 2000.
INFORMATION RELATING TO VARIOUS PROPOSALS
INFORMATION CONCERNING DIRECTORS AND MANAGEMENT
The Board of Directors is divided into three classes of directors,
consisting of one class of two members and two classes of one member each, or
four members in the aggregate. The term of each class is three years. The Board
of Directors currently consists of four members, James R. McCullough, Daniel W.
Latham, John M. Eger and J. Thomas Markley. The number of directors to be
elected at the Annual Meeting is one. The nominee has agreed to stand for
re-election at the Annual Meeting to hold office for a period of three years,
and in any event until a successor is elected and qualified. It is intended that
the accompanying proxy will be voted in favor of the following persons to serve
as director, unless the stockholder indicates to the contrary on the proxy.
The persons named in the accompanying proxy intend to vote for the election
as director of the nominee listed herein. The nominee has consented to serve if
elected. The Board of Directors has no reason to believe that the nominee will
not serve if elected, but if he should become unavailable to serve as a
director, and if the Board of Directors designates a substitute nominee, the
persons named as proxies will vote for the substitute nominee designated by the
Board of Directors.
The following table sets forth certain information with respect to each
person who is currently a director of the Company and the individual nominated
and recommended to be elected to the Board of Directors of the Company and is
based on the records of the Company and information furnished to it by such
persons. Reference is made to "Security Ownership of Certain Beneficial Owners
and Management" for information pertaining to stock ownership by each director
and executive officer of the Company and the nominee.
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
John M. Eger............... 60 Director
Daniel W. Latham........... 51 President, Chief Operating Officer and Director
J. Thomas Markley.......... 67 Director
James R. McCullough........ 32 Chief Executive Officer and Director
</TABLE>
NOMINEE FOR ELECTION AS A DIRECTOR WITH TERM EXPIRING IN 2002
DANIEL W. LATHAM, age 51, has been a director of the Company since November
1996. He has been President and Chief Operating Officer of the Company since
November 1996 and President of Coyote Technologies, LLC ("CTL") since September
1995. Prior to his association with CTL, Mr. Latham was the President of
Frontier Communications Long Distance Company.
DIRECTORS WITH TERMS EXPIRING IN 2001
J. THOMAS MARKLEY, age 67, has been a director of the Company since
September 1999, and previously served as an advisor to the Company's Board of
Directors. Mr. Markley has served as President of JTM, Inc., a consulting firm
specializing in senior management consulting for telecommunications, data
communications and electric utilities, since July 1989. Previously, Mr. Markley
was Senior Vice President, Telecommunications Operations and Planning for
SALIENT(3) Communications, Inc., a telecommunications company that designs,
manufactures and markets equipment for communications network operators
worldwide. Mr. Markley also held senior management positions with Raytheon, a
leading diversified technology company, as Corporate Vice President, President
of Raytheon Data Systems and President of Raytheon Worldwide. Prior to Raytheon,
Mr. Markley was Deputy Program Manager of NASA's Apollo Program. Mr. Markley has
served
2
<PAGE> 5
on the President's Science Advisory Council, as a member of the Space Defense
Initiative Committee and as an examiner for the Malcolm Baldridge National
Quality Award.
JAMES R. MCCULLOUGH, age 32, has been a director and Chief Executive
Officer of the Company since February 2000. Mr. McCullough's principal
occupation prior to joining the Company was as a Co-President of Renwick
Corporate Financing, Inc., a consulting company, from 1996 to the present. From
1994 to 1997, Mr. McCullough was the general partner of an investment fund
focusing on early stage technology companies.
DIRECTOR WITH TERM EXPIRING IN 2000
JOHN M. EGER, age 60, has been a director of the Company since February
2000. As a telecommunications lawyer, Mr. Eger is a professor at San Diego State
University where he serves as the Lionel Van Deerlin Endowed Chair of
Communications and Public Policy and Executive Director of the University's
International Center for Communications. Earlier, Mr. Eger established CBS
Broadcast International and was Senior Vice President of the CBS Broadcast
group. From 1971 - 1973, he was legal assistant to the chairman of the Federal
Communications Commission, and from 1974 - 1976, served as Telecommunications
Advisor to Presidents Nixon and Ford and Head of the White House Office of
Telecommunications Policy. Mr. Eger also serves as a director of GTC Telecom
Corp.
COMMITTEES OF THE BOARD -- BOARD MEETINGS
The Board of Directors has established an audit committee and an executive
committee to assist it in the discharge of its responsibilities. The principal
responsibilities of each committee and the members of each committee are
described in succeeding paragraphs. Actions taken by any committee of the Board
of Directors are reported to the Board of Directors, usually at its next meeting
or by written report.
The Audit Committee of the Board of Directors currently consists of J.
Thomas Markley and John M. Eger. During the 1999 fiscal year Jack E. Donnelly
and Stephen W. Portner, former directors of the Company, served as members of
the Audit Committee. The Audit Committee held one meeting during each of the
fiscal years ended March 31, 1999 and March 31, 2000. The Audit Committee is
responsible for recommending the appointment of a firm of independent public
accountants to examine the financial statements of the Company and its
subsidiaries for the coming year. In making this recommendation, the Audit
Committee reviews the nature of audit services rendered, or to be rendered, to
the Company and its subsidiaries. The Audit Committee reviews with
representatives of the independent public accountants the auditing arrangements
and scope of the independent public accountants' examination of the financial
statements, results of those audits, their fees and any problems identified by
the independent public accountants regarding internal accounting controls,
together with their recommendations. The Audit Committee also meets with the
Company's Chief Financial Officer to review reports on the functioning of the
Company's programs for compliance with its policies and procedures regarding
financial controls and internal auditing. This includes an assessment of
internal controls within the Company and its subsidiaries based upon the
activities of the Company's internal auditing personnel as well as an evaluation
of the performance. The Audit Committee is also prepared to meet at any time
upon request of the independent public accountants or the Chief Financial
Officer to review any special situation arising in relation to any of the
foregoing subjects.
The Executive Committee of the Board of Directors currently consists of
Daniel W. Latham, James R. McCullough and John M. Eger. The Executive Committee
has and may exercise all of the powers of the Board of Directors in the
management of the business and affairs of the corporation during intervals
between meetings of the Board of Directors, except with respect to amendments to
the Certificate of Incorporation or by-laws, merger, consolidation, sale of all
or substantially all of the corporation's assets, dissolution, declaration of
dividends, authorization of issuance of stock, or filling vacancies on the Board
of Directors. The Executive Committee did not meet during the fiscal years ended
March 31, 1999 and March 31, 2000. All issues were discussed and reviewed by the
Board of Directors.
The Board of Directors does not have a nominating committee or a
compensation committee. These functions are performed by the Board of Directors
as a whole. The Board of Directors met or acted by
3
<PAGE> 6
unanimous written consent on nine occasions during the fiscal year ended March
31, 1999 and on 19 occasions during the fiscal year ended March 31, 2000. All
directors attended at least 75% of the meetings held by the Board of Directors
and committees of which they are members during each of the 1999 and 2000 fiscal
years.
There are no family relationships among any of the directors or executive
officers of the Company. The Company's executive officers serve in such capacity
at the pleasure of the Board of Directors.
EXECUTIVE OFFICERS
Information is set forth below regarding those executive officers of the
Company who are not also directors of the Company, including their age,
principal occupation during the last five years and the date each first became
an executive officer of the Company.
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Timothy G. Atkinson............... 43 Vice President of Business
Development and General Counsel
and Secretary
Cheryl Johnson.................... 40 Controller and Principal Finance
and Accounting Officer
</TABLE>
TIMOTHY G. ATKINSON, age 43, has served as the Company's Vice President of
Business Development and General Counsel since April 2000 and as the Company's
Secretary since May 2000. Prior to joining the Company, Mr. Atkinson was in
private practice as a shareholder and Managing Partner of the Denver office of
Reinhart, Boerner, Van Deuren, Norris & Rieselbach from April 1991 to May 2000.
CHERYL JOHNSON, age 40, has been the Controller and Principal Finance and
Accounting Officer of the Company since June 2000 and has served as the Chief
Financial Officer of the Company's wholly owned subsidiary, INET Interactive
Network Systems, Inc. since March 2000. From January 1998 to January 2000, Ms.
Johnson served as the Chief Financial Officer of G&H Technology, Inc. Before
joining G&H Technology, Inc., Ms. Johnson was a Senior Manager with Ernst &
Young, LLP from March 1995 to January 1998. Ms. Johnson is a certified public
accountant with 16 years of accounting, financial and business management
experience working with public and privately held companies.
4
<PAGE> 7
EXECUTIVE COMPENSATION
All shares and per share numbers included herein have been retroactively
adjusted to give effect to a 5% stock dividend which was paid on November 4,
1998 to holders of record as of October 21, 1998.
The following table sets forth, for the three fiscal years ended March 31,
1999, the total annual compensation paid to, or accrued by the Company for the
account of, James J. Fiedler, Daniel W. Latham and Brian A. Robson (the "Named
Executives") serving as such at March 31, 1999 and one former executive officer:
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
ANNUAL COMPENSATION COMPENSATION
------------------------------------ ------------
OTHER SECURITIES ALL
NAME AND ANNUAL UNDERLYING OTHER
PRINCIPAL POSITION(1) YEAR SALARY BONUS COMPENSATION(6) OPTIONS COMPENSATION
--------------------- ---- -------- ------- --------------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
James J. Fiedler(2)... 1999 $300,000 $ 9,335 $20,000 94,500(7) $ 7,200(9)
Former Chairman, CEO 1998 $200,000 $19,746 $15,000 -- $ 7,200(9)
and Director 1997 $200,000 -- $ 3,720 -- --
Daniel W. Latham(3)... 1999 $300,000 $ 9,335 $20,000 94,500(7) $ 7,200(9)
President, COO 1998 $175,000 $19,746 $15,000 -- $ 7,200(9)
and Director 1997 $175,000 -- $ 3,750 -- $170,197(10)
Brian A. Robson(4).... 1999 $152,487 $12,875 -- 98,125(8) --
Former Executive 1998 $139,907 -- -- 13,125 $ 21,921(11)
Vice President, 1997 $ 56,250 -- -- $ 13,041(11)
CFO and Secretary
Edward Beeman(5)...... 1999 $ 79,526 -- -- -- $ 53,548(12)
Former Executive 1998 -- -- -- -- --
Vice President, 1997 -- -- -- -- --
CFO and Secretary
</TABLE>
---------------
(1) As a result of the changes in the Company's management in January 2000,
there will be significant differences in the executive compensation for the
Company's fiscal year ending March 31, 2000. As described in the Company's
Current Report on Form 8-K, dated as of January 25, 2000, Mr. Fiedler was
succeeded as Chief Executive Officer by Mr. James R. McCullough.
(2) On November 29, 1996, Mr. Fiedler was appointed Chairman and Chief
Executive Officer of the Company. Mr. Fiedler also remained as Chairman and
Chief Executive Officer of CTL. Effective as of January 26, 2000, Mr.
Fielder resigned as Chief Executive Officer and effective as of February
29, 2000 he resigned as Chairman of the Board and as a director. (See
"Employment Agreements").
(3) On November 29, 1996, Mr. Latham was appointed President and Chief
Operating Officer of the Company. Mr. Latham also remained as President of
CTL (See "Employment Agreements").
(4) On October 31, 1996, Mr. Robson was appointed Vice President and Controller
of the Company. On December 15, 1998, Mr. Robson was appointed Executive
Vice President, Chief Financial Officer and Secretary of the Company. On
June 15, 2000, Mr. Robson resigned as Executive Vice President, Chief
Financial Officer and Secretary of the Company.
(5) On June 1, 1998, Mr. Beeman was appointed Executive Vice President, Chief
Financial Officer and Secretary of the Company. In November 1998, Mr.
Beeman's employment with the Company was terminated.
(6) Compensation for serving on the Board of Directors.
(7) Pursuant to their respective employment agreements, Messrs. Fiedler and
Latham are entitled to receive ten year stock options to purchase a total
of 450,000 shares of Common Stock over a period of five years, to be
granted in increments of 90,000 shares annually, at various exercise prices
for each 90,000 share increment. As adjusted for the stock dividend, each
90,000 share increment has been adjusted to a 94,500 share increment, and
the exercise price of each of the five 94,500 share increments is $3.81,
$7.62, $11.43, $15.24 and $19.05, respectively. Effective as of January 24,
2000, by action of the
5
<PAGE> 8
Company's Board of Directors, the terms of Messrs. Fiedler's and Latham's
employment agreements were modified to provide for immediate acceleration
of the award of 378,000 options and repricing of 94,500 options which were
awarded on April 1, 1999 at an exercise price of $7.62 per share. All of
such options are currently exercisable at an exercise price of $5.00 per
share.
(8) Stock options to purchase 13,125 shares of Common Stock were granted on
June 1, 1997 at $2.86 per share. Stock options to purchase 13,125 shares of
Common Stock were granted on June 1, 1998 at $3.90 per share. Stock options
to purchase 85,000 shares of Common Stock were granted on December 11, 1998
at $6.56 per share.
(9) Represents automobile allowance.
(10) Represents relocation assistance and $98,000 paid to Mr. Latham to cover
his loss on a personal residence and related real estate commissions and
selling expenses.
(11) Represents relocation assistance paid by the Company.
(12) Represents automobile allowance and relocation assistance paid by the
Company.
OPTIONS GRANTED IN LAST FISCAL YEAR(1)
The table below provides information regarding stock options granted during
the fiscal year ended March 31, 1999 to the Named Executives:
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
---------------------------------------------------------------------------
POTENTIAL REALIZABLE
VALUE AT ASSUMED
NUMBER OF % OF TOTAL ANNUAL RATE OF STOCK
SHARES OPTIONS PRICE APPRECIATION
UNDERLYING GRANTED TO FOR OPTION TERM(2)
OPTIONS EMPLOYEES EXERCISE EXPIRATION --------------------
GRANTED IN FISCAL YEAR PRICE DATE 5% 10%
---------- -------------- -------- ---------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
James J. Fiedler.............. 94,500(3) 9.3% $3.81 04/01/08 $226,430 $573,819
Daniel W. Latham.............. 94,500(3) 9.3% $3.81 04/01/08 $226,430 $573,819
Brian A. Robson............... 13,125(4) 1.3% $3.90 06/01/03 $ 14,142 $ 31,250
85,000(5) 8.3% $6.56 12/11/03 $154,055 $340,420
</TABLE>
---------------
(1) As a result of the changes in the Company's management in January 2000,
there will be significant differences in the options granted for the
Company's fiscal year ending March 31, 2000. As described in the Company's
Current Report on Form 8-K, dated as of January 25, 2000, Mr. Fiedler was
succeeded as Chief Executive Officer by Mr. James R. McCullough. In
addition, Mr. Robson resigned as Executive Vice President, Chief Financial
Officer and Secretary of the Company effective June 15, 2000.
(2) The dollar amounts under these columns are the results of calculations at
the 5% and 10% rates set by the Securities and Exchange Commission. The
potential realizable values are not intended to forecast possible future
appreciation, if any, in the market price of the Common Stock.
(3) Effective as of January 24, 2000, by action of the Company's Board of
Directors, the terms of Messrs. Fiedler's and Latham's employment agreements
were both modified to provide for immediate acceleration of the award of
378,000 options, including the repricing of 94,500 options which were
originally awarded on April 1, 1999 at an exercise price of $7.62 per share.
All of these options are currently exercisable at an exercise price of $5.00
per share. Assuming the $5.00 per share exercise price, the Potential
Realizable Value at Assumed Annual Rate of Stock Price Appreciation for
Option Term would be $1,188,610 and $3,012,173 for 5% and 10%, respectively.
(4) These options vest annually in one-third increments commencing June 1, 1999.
(5) These options vest annually in one-third increments commencing December 11,
1999.
6
<PAGE> 9
AGGREGATED OPTION EXERCISES DURING THE FISCAL YEAR ENDED MARCH 31, 1999 AND
FISCAL YEAR END OPTION VALUES
The table below provides information regarding the value of the
in-the-money stock options held by the Named Executives at March 31, 1999. The
Named Executives did not exercise any stock options during the fiscal year. As a
result of the changes in the Company's management in January 2000, there will be
significant differences in the options granted for the Company's fiscal year
ending March 31, 2000. As described in the Company's Current Report on Form 8-K,
dated as of January 25, 2000, Mr. Fiedler was succeeded as Chief Executive
Officer by Mr. James R. McCullough. In addition, Mr. Robson resigned as
Executive Vice President, Chief Financial Officer and Secretary of the Company
on June 15, 2000.
<TABLE>
<CAPTION>
VALUE OF UNEXERCISED
NUMBER OF UNEXERCISED IN-THE-MONEY OPTIONS AT
OPTIONS AT MARCH 31, 1999 MARCH 31, 1999(1)
---------------------------- ----------------------------
EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
James J. Fiedler........................... -- 94,500 -- $195,615
Daniel W. Latham........................... -- 94,500 -- $195,615
Brian A. Robson............................ 4,375 106,875 $13,212 $ 52,412
</TABLE>
---------------
(1) Value based on the closing price of $5.88 of the Common Stock on The Nasdaq
National Market on March 31, 1999, less the option exercise price. Does not
include, as to Messrs. Fiedler and Latham, an aggregate of 378,000 options
each, which vested in January 2000 pursuant to a modification of their
respective employment agreements. If such options were added, the value of
such unexercisable in-the-money options for Messrs. Fiedler and Latham would
increase to $582,255 for each, as the exercise prices of such grants were
repriced at $5.00 per share.
STOCK OPTION PLANS
On December 11, 1986, the Board of Directors adopted the Company's 1986
Non-Qualified Stock Option Plan (the "1986 Plan"). The 1986 Plan, as amended,
provides for the grant of options to purchase up to 832,963 shares of Common
Stock to executive officers, key officers, employees, directors and consultants
of the Company and its subsidiaries. In February 1998, the Board of Directors
adopted the Company's Non-Employee Director Stock Option Plan (the "Director
Plan"). The Director Plan provides for the grant of options to purchase up to
157,500 shares of Common Stock to non-employee directors of the Company. In
March 1996, the Board of Directors adopted the Employees Non-Qualified Stock
Option Plan of CTL (the "CTL Plan"). The CTL Plan provides for the grant of
options to purchase up to 2,100,000 shares of Common Stock to executive
officers, key employees, directors, consultants and advisors of the Company, its
affiliates and subsidiaries. On March 8, 2000, the Board of Directors of the
Company adopted, and at the Annual Meeting, the stockholders will be asked to
approve, the Company's 2000 Equity Incentive Plan (the "Equity Plan"). The
Equity Plan provides for the grant of options to purchase up to 4,000,000 shares
of Common Stock to directors, officers, key employees and consultants of the
Company and its subsidiaries.
As of June 19, 2000, options to purchase 592,463, 157,500 and 2,100,000
shares of Common Stock have been granted under the 1986 Plan, the Director Plan
and the CTL Plan, respectively. As of June 19, 2000, 442,956, 0 and 1,291,160
shares of Common Stock have been issued pursuant to the exercise of options
under the 1986 Plan, the Director Plan and the CTL Plan, respectively. As of
June 19, 2000, subject to stockholder approval, options to purchase 911,500
shares of Common Stock have been granted under the Equity Plan. No shares have
been issued pursuant to the exercise of options under the Equity Plan. Any
unexercised options that expire in accordance with their terms or terminate upon
a director's resignation or an employee's ceasing to be employed by the Company,
its affiliates or subsidiaries become available again for issuance under the
1986 Plan, the Director Plan, the CTL Plan or the Equity Plan, as the case may
be.
In April 1998, stock options to purchase 10,500 shares of Common Stock were
granted to each of the non-employee members of the Board of Directors pursuant
to the Director Plan. These options have an exercise price of $3.42 per share.
In September 1999, stock options to purchase 21,000 shares of Common
7
<PAGE> 10
Stock were granted to J. Thomas Markley pursuant to the CTL Plan. These options
have an exercise price of $4.40 per share.
In January 2000, stock options to purchase 750,000 shares of Common Stock
were granted to James R. McCullough. Of such options, 300,000 vested immediately
and the balance vest in three installments of 100,000, 150,000 and 200,000 on
January 14, 2001, 2002 and 2003, respectively. These options have an exercise
price of $5.00 per share.
In January 2000, stock options to purchase 50,000 shares of Common Stock
were granted, subject to stockholder approval, to one of the Company's
independent directors, J. Thomas Markley, and to former directors Stephen W.
Portner and Jack E. Donnelly, pursuant to the Equity Plan and the Director Plan.
These options are fully vested and have an exercise price of $5.00 per share. In
February 2000, stock options to purchase 50,000 shares of the Company's Common
Stock were granted, subject to stockholder approval, to one of the Company's
independent directors, John M. Eger, pursuant to the Equity Plan. Such options
are fully vested and have an exercise price of $5.50 per share.
EMPLOYMENT AGREEMENTS
On April 1, 1998, the Company entered into employment agreements, expiring
on March 31, 2003, with Mr. Fiedler and Mr. Latham (the "Executives"). Pursuant
to their employment agreements, the Executives will receive a guaranteed minimum
annual salary of $300,000 or an amount based on a percentage of the Company's
pre-tax income, whichever is greater, with a maximum salary of $4.5 million. The
Executives shall also receive deferred compensation for five years following
each Executive's five-year employment term (the "Employment Term") based on a
percentage of the Company's pre-tax income during each year of the Employment
Term; however, deferred compensation shall not exceed $600,000 per year. The
employment agreements also provide that the Executives will not compete with the
Company for one year following the termination of their respective employment.
By action of the Company's Board of Directors on January 24, 2000, certain terms
of the employment agreements were modified to provide for the following: (i)
94,500 unvested options previously awarded to each of the Executives pursuant to
the employment agreements were repriced at an exercise price of $5.00 per share
and became immediately exercisable, (ii) immediate award of their remaining
entitlement of 283,500 options as currently exercisable at $5.00 per share;
(iii) medical benefits were extended to June 30, 2006, and (iv) payment of a
cash incentive of $150,000 to each Executive if they remain at the Company
through July 24, 2000, or if they are terminated.
Mr. Fiedler relinquished his duties as Chief Executive Officer of the
Company and retired from the Company's Board of Directors, effective as of
January 26, 2000 and February 29, 2000, respectively. In accordance with the
terms of Mr. Fiedler's employment agreement and the separation agreement entered
into between the Company and Mr. Fiedler on February 16, 2000, the Company will
pay Mr. Fiedler severance payments through March 31, 2003 at his present salary.
In addition, in lieu of the $150,000 incentive payment referenced above, the
Company will grant to Mr. Fiedler 200,000 immediately vested options to purchase
Common Stock at an exercise price of $5.00 per share.
On January 26, 2000, the Company appointed James R. McCullough as its Chief
Executive Officer to succeed Mr. Fiedler. Also on January 26, 2000, the Company
entered into an employment agreement with Mr. McCullough pursuant to which he
will receive a salary of $160,000 per annum and options to purchase up to
750,000 shares of Common Stock at $5.00 per share. Of such options, 300,000
vested immediately and the balance vest in three installments of 100,000,
150,000 and 200,000 on January 14, 2001, 2002 and 2003, respectively. The
options will immediately vest upon a change in control and the vesting will be
accelerated if certain Common Stock price targets are met and sustained. If Mr.
McCullough is terminated by the Company without cause or Mr. McCullough
terminates the agreement for good cause, he is entitled to receive his base
salary for a period of six months and the vesting schedule for the options will
remain in effect. If Mr. McCullough voluntarily terminates the agreement or is
terminated by the Company for cause, he is not entitled to any additional
compensation after the termination date and all unvested options will terminate.
The agreement also provides that Mr. McCullough will meet with the Audit
Committee no later than six months after the execution of the agreement to
discuss adjusting Mr. McCullough's compensation. In June 2000,
8
<PAGE> 11
Mr. McCullough met with the Audit Committee and the Board of Directors approved
the Audit Committee's recommendation to award Mr. McCullough additional
compensation based on Mr. McCullough's performance in the preceding five months.
Specifically, Mr. McCullough was granted an option to purchase 750,000 shares of
Common Stock at an exercise price of $7.00 per share. The option vests in three
equal blocks of 250,000 each when the closing bid price of the Common Stock for
20 consecutive trading days exceeds $12.00, $16.00 and $20.00 per share,
respectively. In addition, the vesting provisions will be accelerated if Mr.
McCullough is terminated without cause or there is a change in control of the
Company.
On April 15, 2000, the Company entered into an employment agreement with
Mr. Atkinson pursuant to which he will receive a salary of $180,000 per annum
and options to purchase 150,000 shares of Common Stock at $9.00 per share and
options to purchase 100,000 shares of Common Stock at $7.00 per share. These
options vest and become exerciseable in three equal installments on October 15,
2000, April 15, 2001 and October 15, 2001. The options will immediately vest
upon a change in control. If Mr. Atkinson is terminated by the Company without
cause or Mr. Atkinson terminates the agreement for good cause, he is entitled to
receive his base salary for a period of six months and the vesting schedule for
the options will remain in effect. If Mr. Atkinson voluntarily terminates the
agreement or is terminated by the Company for cause, he is not entitled to any
additional compensation after the termination date and all unvested options will
terminate. Mr. Atkinson also received, as a signing bonus, $50,000 and 25,000
shares of Common Stock.
Effective June 15, 2000, the Company and Mr. Robson entered into a
separation agreement. Under the agreement, Mr. Robson resigned as Executive Vice
President, Chief Financial Officer and Secretary of the Company effective June
15, 2000. Under the terms of the agreement, Mr. Robson is entitled to receive
$15,000 per month through October 31, 2000 and medical, dental and life
insurance benefits through August 31, 2001. In addition, all unvested options
became fully vested and Mr. Robson received a fully-vested option to purchase
50,000 shares of Common Stock at an exercise price of $5.00 per share. Mr.
Robson has also agreed to provide the Company with consulting services with
respect to the preparation of the Company's Securities and Exchange Commission
filings.
COMPENSATION OF DIRECTORS
Directors receive an annual fee of $15,000, paid on a monthly basis.
Directors are also reimbursed for travel expenses. In addition, directors
receive up to $1,250 per day for each meeting attended (board or committee).
Non-employee directors (including retired directors as determined by the Board)
receive supplemental medical reimbursement to pay all medical expenses for them
and their immediate families (spouses and unemancipated children) up to a limit
of $25,000 per year. In addition, effective as of February 2, 2000 and subject
to stockholder approval of Proposal 2, the Company has granted immediately
exercisable options to purchase 50,000 shares of the Common Stock to each of the
Company's non-employee directors at an exercise price of $5.00 per share.
REPORT ON REPRICING OF OPTIONS
The Company did not adjust or amend the exercise price of stock options
previously awarded to the Named Executives during the fiscal year ended March
31, 1999, except to reflect the 5% stock dividend issued on November 4, 1998 to
stockholders of record as of October 21, 1998. In January 2000, the Company did
adjust the exercise price of 189,000 options previously awarded to Messrs.
Fiedler and Latham pursuant to their respective employment agreements. The
exercise prices of such options were adjusted from $7.62 to $5.00 per share.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Board of Directors does not have a compensation committee because
executive compensation decisions are made by the full Board. Recommendations on
executive compensation with regard to Messrs. Fiedler and Latham are made by the
outside non-employee directors when requested to do so by the full Board. All
directors participate in the deliberations.
9
<PAGE> 12
From November 1996 until January 26, 2000, when he was succeeded by Mr.
McCullough, Mr. Fiedler served as the Company's Chairman and Chief Executive
Officer. Mr. Latham is the Company's President and Chief Operating Officer.
Messrs. Fiedler's and Latham's fiscal 1999 compensation and employment contracts
are described above.
PERFORMANCE GRAPH
The graph below compares the cumulative total stockholder return on the
Common Stock for the last six fiscal years with the cumulative total return on
the Nasdaq Telecom Index and Standard & Poor's Midcap 400 Stock Index over the
same period (assuming the investment of $100 in the Common Stock, the Nasdaq
Telecom Index and Standard & Poor's Midcap 400 Stock Index on April 1, 1994, and
the reinvestment of all dividends).
COMPARISON OF CUMULATIVE TOTAL RETURNS*
<TABLE>
<CAPTION>
COYOTE NETWORK ($) NASDAQ TELECOM INDEX ($) S & P MIDCAP 400 ($)
------------------ ------------------------ --------------------
<S> <C> <C> <C>
1995 100.00 100.00 100.00
1996 619.26 132.10 132.47
1997 135.69 158.29 157.34
1998 93.30 234.26 200.54
1999 139.52 277.51 221.39
2000 261.22 327.30 268.69
</TABLE>
---------------
* Total return based on $100 initial investment and reinvestment of dividends.
Notwithstanding anything to the contrary set forth in any of the Company's
previous filings made under the Securities Act of 1933, as amended, or the
Securities Exchange Act of 1934, as amended, that might incorporate future
filings made by the Company under those statutes, the preceding Stock
Performance Graph is not to be incorporated by reference, in whole or in part,
into any such prior filings, nor shall such graph or report be incorporated by
reference into any future filings made by the Company under those statutes.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information as of June 19, 2000
regarding the beneficial ownership of the Company's Common Stock by (a) each
person known by the Company to own beneficially more than 5% of the Company's
Common Stock, (b) each director and the Named Executives, and (c) all directors
and executive officers of the Company as a group. Except as otherwise indicated
and subject to community property laws where applicable, the persons named in
the table below have sole voting and dispositive power with respect to the
shares of Common Stock shown as beneficially owned by them. Information as to
Alan J. Andreini and Kiskiminetas Springs School was derived from the Schedules
13D and 13G filed by each such stockholder. Information as to Richard L. Haydon
was derived from the Schedule 13D filed by Mr. Haydon on March 20, 2000, as well
as information provided to the Company by Mr. Haydon. Except for the
10
<PAGE> 13
percentage of ownership, the information set forth below reflects the
information contained in the Schedule 13G and/or 13D as of the date such
Schedule 13G or 13D was filed, where applicable.
<TABLE>
<CAPTION>
PERCENT OF
NAME AND ADDRESS NUMBER OF SHARES OUTSTANDING
OF BENEFICIAL OWNER BENEFICIALLY OWNED SHARES
------------------- ------------------ -----------
<S> <C> <C>
James R. McCullough(1).................. 578,278(2) 3.3%
James J. Fiedler(1)..................... 1,020,288(3) 5.7%
Daniel W. Latham(1)..................... 610,313(4) 3.4%
J. Thomas Markley(1).................... 60,000(5) *
John M. Eger(1)......................... 50,000(6) *
Brian A. Robson(1)...................... 161,251(7) *
Edward Beeman........................... 0 *
Alan J. Andreini(8)..................... 1,467,645(9) 8.4%
Richard L. Haydon(10)................... 1,517,230(11) 8.4%
Kiskiminetas Springs School(12)......... 969,710(13) 5.6%
Omega Capital Advisers(14).............. 2,052,632(15) 11.8%
All directors and executive officers of
the Company as a group(6 persons)..... 1,423,591(2) 7.7%
(4)(5)(6)(16)
</TABLE>
---------------
* Less than 1%
(1) The address of the stockholder is: c/o Coyote Network Systems, Inc., 1640
S. Sepulveda Blvd., Suite 320, Los Angeles, CA 90025.
(2) Includes 300,000 shares of Common Stock issuable upon the exercise of stock
options which are currently exercisable at $5.00 per share. Does not
include 450,000 share of Common Stock issuable at $5.00 per share upon the
exercise of options which vest over a period of three years, subject to
acceleration if certain Common Stock price targets are met and sustained.
In addition, includes 277,778 of the 833,344 shares of Common Stock held by
KRJ, LLC, an entity in which Mr. McCullough owns a one-third equity
interest. Mr. McCullough disclaims any beneficial ownership interest in the
shares of Common Stock held by KRJ, LLC.
(3) Includes 472,500 shares of Common Stock issuable upon exercise of stock
options which are currently exercisable, subject to, in the case of options
to purchase 378,000 shares, stockholder approval of Proposal 2. Also
includes 108,675 shares of Common Stock issuable upon exercise of warrants
which are currently exercisable. Includes 192,938 shares of Common Stock
received by the stockholder upon conversion of Class B Units of Coyote
Technologies, LLC ("CTL") on June 24, 1999 and 75,075 shares received by
the stockholder upon exercise of warrants on September 8, 1999.
(4) Includes 472,500 shares of Common Stock issuable upon exercise of stock
options which are currently exercisable, subject to, in the case of options
to purchase 378,000 shares, stockholder approval of Proposal 2. Includes
137,813 shares of Common Stock received by the stockholder upon conversion
of Class B Units of CTL on July 7, 1999 and September 2, 1999.
(5) Includes 60,000 shares of Common Stock issuable upon exercise of stock
options which are currently exercisable, subject to, in the case of options
to purchase 50,000 shares, stockholder approval of Proposal 2.
(6) Includes 50,000 shares of Common Stock issuable upon exercise of stock
options which are currently exercisable, subject to, in the case of all
such options, stockholder approval of Proposal 2.
(7) Includes 161,251 shares of Common Stock issuable upon exercise of stock
options which are currently exercisable, subject to, in the case of options
to purchase 50,000 shares, stockholder approval of Proposal 2.
(8) The address of Alan J. Andreini is: 395 Hudson Street, New York, NY 10014.
11
<PAGE> 14
(9) Includes 1,101,010 shares of Common Stock held by Mr. Andreini for his own
account. Includes 145,700 shares held in the account of Kiskiminetas
Springs School (the "School"), 24,950 shares held in the account of John D.
Andreini (who is deceased) and Blanche M. Andreini (the "Parents"), 95,650
shares held in the account of The Andreini Foundation (the "Foundation")
and 2,625 shares held for the benefit of Alan J. Andreini, Jr. (the "Son"),
of which Mr. Andreini may be deemed to be the beneficial owner. Mr.
Andreini disclaims beneficial ownership of all shares of Common Stock
except those shares held by him for his own account and for the benefit of
the Son. Mr. Andreini has sole voting and dispositive power over 1,199,285
shares of Common Stock (includes 1,101,010 shares held by Mr. Andreini for
his own account, 95,650 shares held in the account of the Foundation and
2,625 shares held in the account of the Son). Mr. Andreini has shared
voting and dispositive power over 170,650 shares of Common Stock (includes
145,700 shares held in the account of the School and 24,950 shares held in
the account of the Parents).
(10) The address of Richard L. Haydon is: 1114 Avenue of the Americas, New York,
NY 10036.
(11) Includes 830,980 shares of Common Stock held in various managed
discretionary accounts of which Mr. Haydon may be deemed to be the
beneficial owner. Includes 686,250 shares of Common Stock issuable upon
exercise of warrants which are currently exercisable, held by various
discretionary accounts, of which Mr. Haydon may be deemed to be the
beneficial owner. Based upon information supplied by this stockholder (in
addition to the information derived from Mr. Haydon's Schedule 13D, filed
on March 20, 2000), Mr. Haydon has sole voting and dispositive power over
1,517,230 shares of Common Stock.
(12) The address of Kiskiminetas Springs School is: 1888 Brett Lane, Saltsburg,
PA 15681.
(13) According to the Schedule 13D filed on February 10, 2000, by Kiskiminetas
Spring School, the School beneficially owns 969,710 shares of Common Stock.
(14) The address of Omega Capital Advisers is 88 Pine Street, 31st Floor, New
York, New York 10005.
(15) Includes 1,052,632 shares of Common Stock purchased by the Stockholder in a
private placement in January 2000.
(16) Includes 1,007,500 shares of Common Stock issuable upon exercise of stock
options and shares of Common Stock granted but not outstanding as of June
19, 2000. Of such shares, 478,000 are subject to stockholder approval of
Proposal 2. Does not include 800,000 shares of Common Stock issuable upon
exercise of stock options not currently exercisable. Of such shares, none
are subject to stockholder approval. Does not include shares of Common
Stock or options held by Messrs. Fielder and Robson, who are no longer
executive officers of the Company, but includes shares of Common Stock and
options to purchase Common Stock held by Mr. Atkinson and Ms. Johnson.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In January 1998, the Board of Directors of the Company approved an
interest-free loan to Daniel W. Latham, the Company's President, Chief Operating
Officer and director, for a maximum amount of $500,000 to be used solely for the
purpose of providing partial down payments on his purchase of a residence in
California. The funding is to be secured by the residential property and is for
a five-year term unless specifically extended by the Board of Directors. Earlier
repayment of the loan will be demanded in the event of either (1) sale or
refinancing of the property; (2) termination of Mr. Latham's employment by the
Company either voluntarily or for cause; or (3) sale by Mr. Latham of all, or
substantially all, of his stock in the Company. As of March 31, 1999 and 2000,
$421,000 was funded to Mr. Latham under this agreement. In October 1998, the
Company amended the terms of the loan, and in agreement with Mr. Latham
established an annual interest rate of 6.5% to be applied to the loan and which
is payable at the completion of the term.
Comdisco, Inc., a technology services and finance company, was the
beneficial owner of approximately 6% of the Common Stock including 515,400
shares purchased by Comdisco on the open market and 192,990 warrants issued in
connection with lease financing provided by Comdisco to our end-user customers.
During fiscal 1998 and fiscal 1999, Comdisco has provided lease financing in a
total amount of $24.0 million to four of the Company's customers. In August
1999, Comdisco filed a Schedule 13G disclosing that its beneficial
12
<PAGE> 15
ownership as of August 23, 1999 consisted solely of the 192,990 warrants and
that Comdisco had ceased to be a beneficial owner of more than 5% of the Common
Stock.
In the third quarter of fiscal 1999, the Company completed and received
funding under two demand loans. The first loan for a total amount of $600,000
was provided to the Company by Mr. James Fiedler, the Company's former Chairman
and Chief Executive Officer, in the amount of $175,000, by Mr. Latham in the
amount of $75,000 and by Mr. Alan J. Andreini, a stockholder who was deemed to
beneficially own approximately 8.4% of the outstanding Common Stock as of June
19, 2000, in the amount of $350,000, in September and October 1999. This loan
bore interest at the bank's prime rate 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 stockholder who was deemed to beneficially
own approximately 8.4% of the outstanding Common Stock as of June 19, 2000, in
the amount of $500,000, by Mr. Andreini in the amount of $225,000 and by three
other stockholders 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 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 at an exercise price of $4.50 per share. The warrants will result
in a non-cash interest expense charge of $0.3 million taken in the fourth
quarter of fiscal 2000.
We repaid these loans and the accrued interest in February and April 2000.
On January 26, 2000, the Company entered into a Consulting Agreement with
KRJ, LLC ("KRJ"), pursuant to which KRJ will provide 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. Mr. McCullough
has an approximately one-third interest in KRJ and the balance of KRJ is owned
by affiliates of First Venture. As compensation for KRJ's services, the Company
issued KRJ 2,000,000 shares of Common Stock. 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 held in escrow were released to KRJ as
certain Common Stock price targets were met. The agreement also provides that
KRJ will meet with the Audit Committee no later than six months after the
execution of the agreement to discuss providing additional compensation to KRJ
based upon the services it has provided as of the date of the meeting. The terms
of the Consulting Agreement were the result of an arms' length negotiation in
which Mr. McCullough did not participate.
On March 31, 2000, the Company entered into a Financial Services Agreement
with First Venture Leasing, LLC ("First Venture"), pursuant to which a limited
liability company ("Venture 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. McCullough, the Company's Chief Executive Officer, had a 25%
equity interest, which he relinquished effective upon his election to the
Company's Board of Directors on February 2, 2000. As partial consideration for
Venture LLC's commitment to fund at least $50,000,000 in leases for the
Company's customers during the 2000 calendar year and the purchase of $14.27
million of accounts receivable of CTL, the Company granted to First Venture two
warrants to purchase 620,000 and 261,600 shares of Common Stock, at an exercise
price of $5.00 and $7.35 per share, respectively. Each warrant is exercisable
for a period of three years. First Venture initially paid the Company $11.5
million for the receivables with the remaining balance of $2.77 million due and
payable based upon the performance of the leases to which the receivables
relate. The terms of the agreement with First Venture were the result of an
arms' length negotiation in which Mr. McCullough did not participate.
Also on March 31, 2000, the Company entered into a Remarketing Agreement
and two separate License Agreements with Venture LLC, pursuant to which Venture
LLC will 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
13
<PAGE> 16
use certain trademarks, service marks, trade names and other designations in
connection with the services to be provided by Venture LLC.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), requires the Company's directors and executive officers, and
persons who beneficially own more than ten percent of a registered class of the
Company's equity securities, to file with the Securities and Exchange Commission
(the "Commission") initial reports of ownership and reports of changes in
ownership of Common Stock and the other equity securities of the Company.
Officers, directors, and persons who beneficially own more than ten percent of a
registered class of the Company's equity securities are required by the
regulations of the Commission to furnish the Company with copies of all Section
16(a) forms they file. To the Company's knowledge, based solely on review of the
copies of such reports furnished to the Company, during the fiscal years ended
March 31, 1999 and 2000, all Section 16(a) filing requirements applicable to its
officers, directors, and greater than ten percent beneficial owners were
complied with, except that transactions that should have been reported on Forms
5 for the fiscal years ended March 31, 1997 and/or March 31, 1998 were reported
on Forms 5 for the fiscal year ended March 31, 1999 for each of Stephen W.
Portner, Sydney B. Lilly, Jack E. Donnelly, Brian A. Robson and James J.
Fiedler, and transactions that should have been reported on Forms 3 and 4 during
the fiscal years ended March 31, 1997 and March 31, 1998 for Alan J. Andreini
were reported on Form 5 for the fiscal year ended March 31, 1999. In addition,
the Form 3 that should have been filed by Alan J. Andreini during the fiscal
year ended March 31, 1997 was filed on April 5, 1999.
PROPOSALS FOR VOTING
PROPOSAL 1: ELECTION OF DIRECTORS
The Board of Directors has nominated Daniel W. Latham for election as a
director of the Company to serve until his term expires in 2002, or in any
event, until his successor has been elected and has qualified.
VOTE REQUIRED
The approval of a plurality of the shares present in person or represented
by proxy, assuming a quorum at the Annual Meeting, is required for election of
the nominee as a director. See "Voting Securities; Proxies," above.
THE BOARD OF DIRECTORS RECOMMENDS YOU VOTE "FOR" THE ELECTION OF THE
NOMINEE TO THE BOARD OF DIRECTORS OF THE COMPANY.
PROPOSAL 2: APPROVAL OF AMENDMENT TO THE COMPANY'S RESTATED CERTIFICATE OF
INCORPORATION TO INCREASE THE AUTHORIZED SHARE CAPITAL
The Board of Directors has determined that it would be advisable to amend
Article IV of the Company's Restated Certificate of Incorporation to increase
the authorized capital stock of the Company such that the aggregate number of
shares which the Company shall have the authority to issue shall be increased
from 35,000,000 to 80,000,000, of which 10,000,000 shares shall be designated
"Preferred Stock" and 70,000,000 shares shall be designated "Common Stock".
The Board of Directors has unanimously adopted and declared it advisable
and unanimously recommends to the Company's stockholders that Article IV of the
Company's Restated Certificate of Incorporation be amended as described.
14
<PAGE> 17
INCREASE IN NUMBER OF AUTHORIZED SHARES OF CAPITAL STOCK
GENERAL
The Board of Directors has approved, subject to stockholder approval at the
Annual Meeting, an increase in the number of authorized shares of Common Stock
from 30,000,000 to 70,000,000 and in the number of authorized shares of
Preferred Stock from 5,000,000 to 10,000,000. The Company's Certificate of
Incorporation currently authorizes the issuance of 30,000,000 shares of Common
Stock and 5,000,000 shares of Preferred Stock. As of June 19, 2000, the record
date for the Annual Meeting (the "Record Date"), (i) 17,430,451 shares of Common
Stock were outstanding (exclusive of 708,692 shares held by the Company as
treasury stock), (ii) 1,115,847 shares were reserved for issuance under the
Company's stock option plans, (iii) 11,966,155 shares were reserved for issuance
in relation to outstanding options and warrants, of which 4,731,020 shares are
contingent upon stockholder approval of this Proposal 2, (iv) 206,666 shares
were reserved for issuance upon conversion of 124 shares of Series A Convertible
Preferred Stock, and (v) 3,157,895 shares were reserved for issuance upon
conversion of 3,157,895 shares of Series B Convertible Preferred Stock.
Accordingly, the Company does not have any authorized shares of Common Stock
unissued and not reserved for future issuance.
The Board of Directors considers the proposed authorization of an
additional 40,000,000 shares of Common Stock desirable because it would provide
the Company with the ability to take advantage of future opportunities for the
issuance of equity in connection with financings, possible future acquisitions,
other programs to facilitate expansion and growth and for other general
corporate purposes, including stock dividends, stock splits and employee benefit
plans, without the delay and expense incident to the holding of a special
meeting of stockholders to consider any specific issuance. Such additional
shares could also be issued in a public offering or privately placed in order to
raise capital for various purposes. Authorized but unissued shares may be issued
at such time or times, to such person or persons and for such consideration as
the Board of Directors determines to be in the best interests of the Company,
without further authorization from the stockholders except as may be required by
the rules of Nasdaq or any stock exchange on which the Common Stock is then
listed. The authorization of additional shares of Common Stock will not, by
itself, have any effect on the rights of holders of existing shares. Any new
shares of Common Stock, when issued, would have the same rights and privileges
as the shares of Common Stock presently outstanding, and would be available for
issuance at such time and on such terms as the Board of Directors may consider
appropriate. Depending on the circumstances, issuance of additional shares of
Common Stock could affect the existing holders of shares by diluting the voting
power of the outstanding shares. The stockholders do not have pre-emptive rights
to purchase additional shares of Common Stock nor will they as a result of this
proposal.
BOARD OF DIRECTORS RESERVATION OF RIGHTS
If the amendment proposed in this Proposal 2 to amend the Company's
Restated Certificate of Incorporation is approved by the stockholders, such
amendment will become effective upon the filing of a Certificate of Amendment of
the Restated Certificate of Incorporation of the Company, with the Secretary of
State of the State of Delaware. The Board of Directors reserves the right,
notwithstanding stockholder approval and without further action by the
stockholders, to elect not to proceed with the amendment, if at any time prior
to filing a Certificate of Amendment with the Secretary of State of the State of
Delaware the Board of Directors, in its sole discretion, determines that the
amendment is no longer in the best interests of the Company and its
stockholders. In addition, the Board of Directors reserves the right to delay
filing the Certificate of Amendment for up to twelve months following
stockholder approval of the Amendment at the Annual Meeting. However, at the
present time, the Board of Directors intends to proceed with the amendment as
presented herein without delay.
In addition to the options and warrants that have been issued subject to
stockholder approval, the Company has entered into agreements to acquire the
following entities or businesses through the issuance of shares of the Company's
capital stock. All of these transactions are contingent upon, among other
things, stockholder approval of Proposal 2.
15
<PAGE> 18
The Company has agreed to acquire Group Long Distance, a domestic long
distance carrier, through the issuance of 700,000 shares of Common Stock. This
amount may be increased up to maximum amount of 910,000 shares dependent upon
the price of the Common Stock on the closing date.
On May 10, 2000, we entered into an Agreement and Plan of Merger,
subsequently amended on May 26, 2000, under which we agreed to acquire Primary
Knowledge, Inc., a California corporation in the process of changing its name to
HomeAccess MicroWeb, Inc. 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. The consummation of the transactions
contemplated by the merger agreement are subject to certain contingencies,
including approval of our stockholders. 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. Accordingly, the Company's stockholders will have an opportunity to vote on
this transaction at a meeting of stockholders to be held after the Annual
Meeting.
The Company has also agreed 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 up to an additional 300,000 shares of Common
Stock if an earn-out even occurs. Finally, the Company has agreed to acquire
Polylink Ltd., a Hong Kong based telecommunications provider, for 250,000 shares
of Common Stock.
VOTE REQUIRED
An affirmative vote of the holders of a majority of the outstanding Common
Stock entitled to vote at the Annual Meeting is required to adopt Proposal 2.
Accordingly, abstentions and broker non-votes could have a significant effect on
the outcome of this proposal. Proxies solicited by the Board of Directors will
be voted in favor of the adoption of Proposal 2 to amend Article IV of the
Certificate of Incorporation unless otherwise indicated thereon.
THE BOARD OF DIRECTORS RECOMMENDS YOU VOTE "FOR" THE APPROVAL OF THE
AMENDMENT TO THE CERTIFICATE OF INCORPORATION, WHICH IS DESIGNATED AS PROPOSAL 2
ON THE ENCLOSED PROXY CARD.
PROPOSAL 3: APPROVAL OF THE 2000 EQUITY INCENTIVE PLAN
The Equity Plan was approved by the Board of Directors of the Company in
March 2000 and the stockholders of the Company will be asked to approve the
Equity Plan at the Annual Meeting. A description of the Equity Plan, which is
attached hereto as Annex A, appears below.
The Board of Directors recommends that the stockholders approve the
adoption of the Equity Plan pursuant to which 4,000,000 shares of Common Stock
will be authorized for issuance thereunder. As of June 19, 2000, options to
purchase an aggregate of 911,500 shares of Common Stock were granted, subject to
stockholder approval of Proposal 2 and this Proposal 3, under the Equity Plan.
DESCRIPTION OF EQUITY PLAN
The Equity Plan is designed to encourage selected individuals to acquire or
increase proprietary interests in the Company, thereby promoting a closer
identity of interest between such individuals and our stockholders.
16
<PAGE> 19
All employees and directors of, and consultants to, the Company and its
affiliates may be selected by the Board of Directors to become participants in
the Equity Plan (each, a "Participant").
The Equity Plan provides that 4,000,000 of the authorized shares of the
Common Stock are available for issuance as awards under the Equity Plan. Options
may be either "incentive stock options" within the meaning of Section 422 of the
Internal Revenue Code of 1986, as amended (the "Code") or non-qualified options.
The Equity Plan is administered by the Board of Directors, which determines,
among other things, those individuals who receive options or awards, the time
period during which the options may be partially or fully exercised, the terms
of the restrictions, if any, on awards, the number of shares of Common Stock
issued as an award or issuable upon the exercise of each option and the option
exercise price and the award purchase and repurchase price. In the event that an
award of a stock option expires or is not exercised or any other award is
forfeited, the shares of Common Stock allocated to such award are again
available for grant under the Equity Plan. The Equity Plan may also be
administered by a committee appointed by the Board of Directors, but there is no
such committee at this time.
The term of each award of a stock option shall be determined by the Board
of Directors. However, the term of any incentive stock options or stock
appreciation rights may not exceed a period of ten years from the date of grant.
Unless otherwise determined by the Board of Directors, an award shall not
be transferable or assignable by a Participant otherwise than by will or by the
laws of descent and distribution. An award exercisable after the death of a
Participant may be exercised by the legatees, personal representatives or
distributees of the Participant. In the event of termination of employment other
than by death or disability, the Participant will have no more than three months
after such termination during which the Participant shall be entitled to
exercise the option, unless otherwise determined by the Board of Directors.
The Equity Plan provides that the Board of Directors may specify
performance targets in connection with awards of stock options. Such performance
targets would be with respect to the following criteria: (i) annual earnings
before payment of taxes and interest: (ii) annual earnings per share; and/or
(iii) annual return on common equity. These performance targets further ensure
that the incentive goals are aligned with shareholder interests.
The Board of Directors may award a stock option in the form of an
"incentive" stock option (as defined in Section 422 of the Code) or a
non-qualified stock option. Such awards expire no more than ten years after the
date they are granted. The exercise price, per share of Common Stock, which may
be purchased pursuant to an option, is determined by the Board of Directors,
but, with respect to incentive stock options, shall not be less than 100% of the
fair market value of a share of Common Stock on the date the option is granted.
The exercise price is payable, as a Participant may elect, in cash, by tendering
shares of already owned Common Stock (which shares have been held by the
Participant for no less than six months, or any combination thereof or by
delivery of irrevocable instruments to a broker to deliver to us.
The Board of Directors may award a stock appreciation right, the amount of
which shall equal the excess of the fair market value of one share of Common
Stock on the date of exercise of the award (or, if the Board of Directors shall
so determine in the case of any such right other than one related to an
incentive stock option, the fair market value of one share of Common Stock on
the date of exercise), over the grant price of the stock appreciation right,
determined by the Board of Directors as of the date of grant, which shall not be
less than the fair market value of one share of Common Stock on the date of
grant. The Board of Directors may, in its sole discretion, determine the manner
of exercise of a stock appreciation right, which may include a limited stock
appreciation right that may only be exercised upon the occurrence of a change in
control, as defined in the Equity Plan. No stock appreciation right shall have a
term longer than ten years from the date of grant, or otherwise be inconsistent
with the requirements for incentive stock options under section 422 of the Code.
The Board of Directors may award shares of Common Stock that are subject to
restrictions on transferability and other restrictions, which restrictions may
lapse separately or in combination at such times, under such circumstances and
in such installments, as the Board of Directors may determine. Upon the
termination of employment or service of the Participant (as determined under
criteria established by the
17
<PAGE> 20
Board of Directors), restricted stock shall be forfeited and reacquired by the
Company. A holder of an award of restricted stock shall have the same rights of
any other holder of Common Stock, including the right to vote and receive
dividends thereon.
The Board of Directors may award to the Participant the right to receive,
upon the expiration of a deferral period specified by the Board of Directors, an
award of Common Stock. This deferred stock may be subject to such restrictions
as the Board of Directors may impose, including which restrictions may lapse
upon expiration of the deferral period or at earlier times, separately or in
combination, in installments, or otherwise. Upon the termination of employment
or service of the Participant (as determined under criteria established by the
Board of Directors), such deferred stock shall be forfeited and reacquired by
the Company. The Board of Directors may also permit the Participant to elect to
defer receipt of any other Common Stock vested in the Participant, to be
acquired by the Participant under the Equity Plan or otherwise. This deferred
stock shall be forfeited, upon the Participant's termination of employment or
service within three years of the date the award is granted, unless excepted by
the Board of Directors as provided in the Equity Plan.
The Board of Directors may grant Common Stock as a bonus, or grant Common
Stock or other awards in lieu of the Company's obligations to pay cash under
other plans or compensatory arrangements, provided that such grant complies with
all applicable securities law. Such grants shall be subject to such terms as the
Board of Directors shall determine. The Board of Directors may also grant the
right to receive cash, Common Stock, or other awards to the Participant that is
equal in value to dividends paid with respect to a specified number of shares of
Common Stock, or other periodic payment. The Board of Directors may provide that
the dividend equivalents shall be paid or distributed when accrued or shall be
deemed to have been reinvested in additional Common Stock, awards or other
investment vehicles as the Board of Directors may specify.
The Board of Directors may grant other types of awards of Common Stock, or
awards based in whole or in part by reference to the fair market value of the
Common Stock. Such other stock-based awards shall be in such form, and dependent
on such conditions, as the Board of Directors shall determine (including,
without limitation, the right to receive one or more shares of Common Stock (or
the equivalent cash value of such shares) upon the completion of a specified
period of service, the occurrence of an event and/or the attainment of
performance objectives). Other stock-based awards may be granted alone or in
addition to any other awards granted under the Equity Plan. The Board of
Directors shall determine whether other stock-based awards shall be settled in
cash, Common Stock or any combination thereof.
Unless otherwise provided by the Board of Directors in an award agreement,
all conditions and/or restrictions relating to the continued performance of
services and or achievement of performance objectives with respect to the
exercisability or full enjoyment of an award shall immediately lapse upon a
change in control, as such term is defined in the Equity Plan. In the event of
any change in the outstanding shares by reason of any share dividend or split,
reorganization, recapitalization, merger, consolidation, spin-off, combination
or exchange of shares or any other corporate exchange, combination or
transaction, or any distribution to shareholders of shares other than regular
cash dividends, the Board of Directors may make an equitable adjustment in (i)
the number or kind of shares or other securities issued or reserved for issuance
pursuant to the Equity Plan or pursuant to outstanding awards, (ii) the option
exercise price and/or (iii) any other affected terms of such awards. In
addition, except as otherwise provided in an award agreement, in the event of a
"change in control" (as defined in the Equity Plan attached hereto), the Board
of Directors in its sole discretion and without liability to any person may take
such actions, if any, as it deems necessary or desirable with respect to any
award (including, without limitation, (i) the acceleration of an award, (ii) the
payment of an amount, made in cash or stock, in exchange for the cancellation of
an award, (iii) the termination of an award after a Participant has been
afforded a certain period of time to exercise such award following the change in
control, and/or (iv) the requiring of the issuance of substitute awards that
will substantially preserve the value, rights and benefits of any affected
awards previously granted hereunder) as of the date of the consummation of the
change in control.
The Board of Directors may amend, alter or discontinue the Equity Plan at
any time, without shareholder approval, unless stockholder approval is required
by any federal or state law or regulation or the rules of any stock exchange or
automated quotation system on which the Common Stock may then be listed or
quoted.
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<PAGE> 21
The Board of Directors may not amend the Equity Plan in such a manner that would
impair the rights or obligations under any award previously granted to any
Participant without such Participant's approval.
It is estimated that approximately 130 individuals are currently eligible
to participate in the Equity Plan. As of June 19, 2000, 6 individuals held
options granted (subject to stockholder approval) under the Equity Plan.
REGISTRATION OF SHARES ISSUED UNDER THE EQUITY PLAN
The Company intends that the shares to be reserved for and issued under the
Equity Plan, for which approval is now sought, will be registered under the
Securities Act of 1933. Such registration, if completed, would in most cases
permit the unrestricted resale in the public market of shares issued pursuant to
the Equity Plan.
NEW PLAN BENEFITS -- EQUITY PLAN
The Company has granted an aggregate of 911,500 options to purchase shares
of Common Stock under the Equity Plan, all of which are subject to stockholder
approval and consist of the following: (i) options to purchase 378,000 shares of
Common Stock at an exercise price of $5.00 per share granted to Mr. Fiedler, the
Company's former Chairman and Chief Executive Officer, (ii) options to purchase
378,000 shares of Common Stock at an exercise price of $5.00 per share granted
to Mr. Latham, the Company's President and Chief Operating Officer, and (iii)
options to purchase 55,500 shares of Common Stock at an exercise price of either
$5.00 or $5.50 per share granted to current directors who are not executive
officers. In each case, the exercise price of such options is greater than or
equal to the market value of the Company's Common Stock as of the date of grant.
Also, in each case, the options are all fully vested and expire 10 years from
the date of grant for Messrs. Fiedler and Latham, and 5 years from the date of
grant for Messrs. Markley and Eger. The Company does not currently know nor is
it determinable the number of options or awards that the Company will grant
under the Equity Plan to any of the aforementioned persons.
The following information reflects options which have been granted under
the Equity Plan, subject to stockholder approval, to certain officers, directors
and employees of the Company:
<TABLE>
<CAPTION>
NUMBER OF
SHARES
UNDERLYING
NAME AND POSITION OPTIONS
----------------- ----------
<S> <C>
James R. McCullough......................................... --
Chief Executive Officer and Director
James J. Fiedler............................................ 378,000
Former Chairman of the Board and Chief Executive Officer
Daniel W. Latham............................................ 378,000
President, Chief Operating Officer and Director
Brian A. Robson............................................. --
Former Executive Vice President, Chief Financial Officer
and Secretary
Edward Beeman............................................... --
Former Executive Vice President, Chief Financial Officer
and Secretary
Executive officers as a group............................... 378,000
Non-executive-directors as a group.......................... 55,500
Non-executive employees as a group.......................... --
</TABLE>
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<PAGE> 22
CERTAIN FEDERAL INCOME TAX CONSEQUENCES OF THE EQUITY PLAN UNDER CURRENT LAW
NON-QUALIFIED OPTIONS
Following are the federal income tax consequences applicable to an Option
Holder who holds non-qualified options, i.e., options that are not incentive
stock options as defined in section 422 of the Code (an "NQO Holder").
An NQO Holder will recognize no taxable income at the time an option is
granted or vests.
The NQO Holder will be required to include in gross income in the year of
exercise of a non-qualified stock option the difference between the fair market
value of the shares transferred on the exercise date and the option price. The
amount so included will be treated as compensation, which is ordinary income.
On the sale or disposition of the shares received upon exercise, the NQO
Holder will recognize capital gain equal to the excess, if any, of the amount
realized upon the disposition of the shares over the fair market value of such
shares on the date of exercise. This will be long-term capital gain if the
disposition is made more than one year after the option is exercised. The
Company will be required to collect withholding taxes with respect to the income
recognized by the NQO Holder upon exercise.
The Company will also be entitled to a federal income tax deduction at the
same time and in the same amount as the NQO Holder is required to include as
compensation income in connection with the exercise of a non-qualified stock
option. However, the Company may not be able to deduct compensation to certain
employees to the extent such employees' compensation exceeds one million dollars
per tax year. Covered employees include the chief executive officer and any
other officer whose compensation is required to be disclosed under the
Securities Act of 1934 by reason of being among the four other highest
compensated officers of the Company for that tax year.
INCENTIVE STOCK OPTIONS
Following are the federal income tax consequences applicable to an Option
Holder who holds incentive stock options as defined in Section 422 of the Code
(an "ISO Holder").
An ISO Holder will recognize no taxable income at the time an incentive
stock option is granted, vests or is exercised. However, the excess, if any, of
the fair market value of the acquired shares over the option price will be an
item of tax preference for purposes of computing the ISO Holder's alternative
minimum tax.
If the ISO Holder disposes of the shares acquired upon exercise within two
years after the date of grant of the incentive stock option or within one year
after receiving those shares (a "Disqualifying Disposition"), the ISO Holder
will realize (i) ordinary income equal to the lesser of (a) the excess, if any,
of the fair market value of the acquired shares on the date of exercise over the
option price thereof, or (b) if the Disqualifying Disposition is a sale or
exchange in which a loss (if sustained) would be recognized, the excess, if any,
of the selling price over the ISO Holder's adjusted basis in such shares, and
(ii) capital gain equal to the excess, if any, of the amount realized on the
Disqualifying Disposition over the fair market value of such shares on the date
of exercise. The capital gain described in part (ii) of the previous sentence
will be long-term capital gain if the Disqualifying Disposition is made more
than one year after the ISO Holder exercises the incentive stock option (but is
nevertheless a Disqualifying Disposition because it occurs within two years
after the date of grant). The Company will be required to collect withholding
taxes with respect to the income recognized by the ISO Holder described in part
(i) above.
Upon a Disqualifying Disposition, the Company will be entitled to a federal
income tax deduction at the same time and in the same amount as the ISO Holder
is required to include as compensation income in connection with the exercise of
a non-qualified stock option. If the ISO Holder does not dispose of the acquired
shares in a Disqualifying Disposition, the Company will have no withholding
obligations and will not be entitled to a federal tax deduction. For a certain
other limitations on the Company's deductions, see the disclosure above with
respect to non-qualified options.
20
<PAGE> 23
If the ISO Holder does not dispose of the acquired shares in a
Disqualifying Disposition, then any gain or loss on a subsequent disposition of
such shares will be treated as long-term capital gain or loss. Such gain or loss
will be the difference between the amount realized on disposition and the option
price.
VOTE REQUIRED
An affirmative vote of a majority of the shares of the Common Stock present
in person or represented by proxy at the Annual Meeting is required to adopt
Proposal 3. Proxies solicited by the Board of Directors will be voted in favor
of the adoption of Proposal 3.
THE BOARD OF DIRECTORS RECOMMENDS YOU VOTE "FOR" THE ADOPTION OF THE
COMPANY'S EQUITY PLAN, WHICH IS DESIGNATED AS PROPOSAL 3 ON THE ENCLOSED PROXY
CARD.
PROPOSAL 4: APPROVAL OF AMENDMENT TO THE COMPANY'S RESTATED
CERTIFICATE OF INCORPORATION CHANGING THE NAME OF THE COMPANY
TO QUENTRA NETWORKS, INC.
The Company is asking the stockholders to vote on a proposal to amend
Article I of the Company's Restated Certificate of Incorporation (the
"Certificate") in order to change the name of the Company to Quentra Networks,
Inc. The Board of Directors unanimously approved such an amendment to the
Certificate on March 15, 2000. If the corporate name change is approved by the
stockholders, it is anticipated that the Company's Common Stock will be traded
under the symbol "QTRA." The Company desires to change the name of the Company
from Coyote Network Systems, Inc. to Quentra Networks, Inc. in order to better
align the Company's name with the marketplace for its products and services.
Upon consummation of the proposed name change it will not be necessary to
surrender stock certificates. Instead, when certificates are presented for
transfer, new certificates bearing the name, Quentra Networks, Inc., will be
issued. If there exists any circumstance which would make consummation of the
name change inadvisable in the judgment of the Board of Directors, the proposal
to amend the Certificate may be terminated by the Board of Directors either
before or after approval of the name change by the stockholders.
VOTE REQUIRED
The affirmative vote of the holders of a majority of the outstanding Common
Stock entitled to vote at the Annual Meeting is required to adopt Proposal 4,
changing the name of the Company to Quentra Networks, Inc. Accordingly,
abstentions and broker non-votes could have a significant effect on the outcome
of this proposal. Proxies solicited by the Board of Directors will be voted in
favor of the adoption of Proposal 4 to amend Article I of the Restated
Certificate of Incorporation unless otherwise indicated thereon.
THE BOARD OF DIRECTORS RECOMMENDS YOU VOTE "FOR" THE APPROVAL OF THE
AMENDMENT TO THE CERTIFICATE OF INCORPORATION, WHICH IS DESIGNATED AS PROPOSAL 4
ON THE ENCLOSED PROXY CARD.
PROPOSAL 5: RATIFICATION OF INDEPENDENT ACCOUNTANTS
Arthur Andersen, LLP has served as independent accountants for the Company
since fiscal year 1998.
The Board of Directors of the Company has appointed Arthur Andersen, LLP as
the Company's independent accountants for fiscal year 2000 and to render other
professional services as required.
The appointment of Arthur Andersen, LLP is being submitted to stockholders
for ratification.
Representatives of Arthur Andersen, LLP will be present at the Annual
Meeting and will be available to respond to appropriate questions.
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<PAGE> 24
CHANGE IN ACCOUNTANTS
On October 15, 1997, after completion of the March 31, 1997 fiscal year
audit, Price Waterhouse LLP ("Price Waterhouse"), the Company's former
independent accountants, in a letter addressed to the Company's Chairman and CEO
(with a copy to the Chief Accountant at the SEC), confirmed that the client-
auditor relationship between Coyote Network Systems, Inc. (formerly The Diana
Corporation) and Price Waterhouse had ceased upon the resignation of Price
Waterhouse. During the third quarter of fiscal 1997, ending on January 4, 1997,
the Company announced a restructuring plan to concentrate its resources on one
line of business (communication switching) via its holdings in Coyote
Technologies, LLC (formerly Sattel Communications LLC; "Sattel"), and, from an
accounting standpoint, to discontinue and divest its other holdings. The Company
sold its largest subsidiary, Atlanta Provision Company, Inc., in February 1997.
The Company moved its headquarters from Milwaukee, Wisconsin to Calabassas,
California and the former Sattel management took over management of the Company.
The change in the Company's focus, size of annual revenues (from over
$200,000,000 to approximately $10,000,000), as well as the change in management
and location, led to the cessation of our client-auditor relationship with Price
Waterhouse.
The reports of Price Waterhouse on the financial statements for the two
fiscal years prior to its resignation contained no adverse opinion or disclaimer
of opinion and were not qualified or modified as to uncertainty, audit scope or
accounting principle, except as to the uncertainties noted in the Report of
Independent Accountants filed with the Company's Form 10-K on September 22,
1997. The uncertainties noted therein relate to the Company's liquidity and
viability, and class action litigation and other potential claims by investors.
Price Waterhouse did not involve the Company's audit committee in its
decision to end the client-auditor relationship.
Except as mentioned below, in connection with its audits for the fiscal
years 1996 and 1997, and through October 15, 1997, there have been no
disagreements with Price Waterhouse with regard to accounting principles or
practices, financial statement disclosure, or auditing scope or procedure which
would have been referenced in Price Waterhouse's reports on the Company's
financial statements for the fiscal years 1996 and 1997 if not resolved to the
satisfaction of Price Waterhouse.
During the audit of the Company's financial statements for the fiscal year
1997, a difference of opinion arose with regard to the procedures necessary for
the audit of sales transactions with certain customers, including Concentric
Network Corporation. The difference of opinion related to the timing and manner
of additional direct contact by Price Waterhouse (in addition to written
receivable confirmation requests) with the Company's customers and management's
related concerns regarding pending legal proceedings involving customers and/the
or potential adverse effect of such contacts by Price Waterhouse on the
Company's customer relationships. After further discussion, the manner of the
customer contact was mutually agreed upon and the initial disagreement thus
promptly (within 1 day) resolved. No accounting disagreements arose in
connection with these sales. The Audit Committee discussed the subject matter of
this disagreement with Price Waterhouse. The Company has authorized Price
Waterhouse to respond fully to the inquiries of its successor auditors
concerning the subject matter of this disagreement.
During the fiscal years 1996 and 1997 and through October 15, 1997, the
Company's management believes that there have been no reportable events (as
defined in Regulations S-K Item 304(a)(1)(v)) except as follows:
(1) During the year-end audit of the accounts for fiscal 1997, the
following weaknesses in internal control were identified:
(1.1) Errors, including instances of failure to properly consider, with
respect to the Company's policy, the effect of non-standard
contract provisions on revenue recognition.
(1.2) Need for a more structured approach by which to thoroughly
complete and document a review of relevant terms and conditions
for all contracts consistent with the Company's revenue
recognition policy/procedure and required revenue recognition
criteria.
22
<PAGE> 25
Upon further review by the Company, it was determined that certain sales
transactions at the Company's Sattel operation were not consistent with
the Sattel policy and procedure and the criteria required to support
revenue recognition in accordance with generally accepted accounting
principles. These errors resulted in revisions to previously reported
unaudited financial information with respect to the second and third
quarters of fiscal year 1997. These revisions, which were included and
reported in Note 16 Quarterly Results of Operations (Unaudited) of Form
10-K filed for the fiscal year 1997, were as follows:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED MARCH 31, 1997
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
12 WEEKS ENDED
----------------------------------------------
OCTOBER 12, 1996 JANUARY 4, 1997
--------------------- ---------------------
ORIGINALLY ORIGINALLY
REPORTED REVISED REPORTED REVISED
---------- ------- ---------- -------
<S> <C> <C> <C> <C>
Net sales.......................... $ 4,046 $ 3,666 $ 4,337 $ 2,552
Gross profit (loss)................ 3,034 2,775 3,057 1,842
Net loss........................... (4,598) (4,737) (4,001) (5,936)
Net loss per common share.......... (.87) (.90) (.76) (1.12)
</TABLE>
The per share amounts presented above do not reflect the Company's November
4, 1998 stock dividend.
(2) In addition to the matter reported in (v)(1) above, it was also noted
that internal control weaknesses existed, which did not result in
revisions to previously reported financial information, relative to
insufficient identification and control surrounding Sattel's
maintenance of detailed historical cost and accumulated depreciation
information by individual asset, and that the timeliness and quality of
account reconciliations and supporting analysis requires improvement in
order to ensure that procedures are in place to support expected
increases in transaction volumes anticipated by the Company.
The following actions are being taken by the Company's management to
correct the identified weaknesses:
- Strengthening of the Company's financial organization to increase the
number of personnel qualified to address revenue recognition issues and
to improve the timeliness and quality of account reconciliations and
analysis.
- Implementation of a more timely and diligent review and resolution by
management of all non-standard contract terms and conditions.
- Development and implementation of a comprehensive system to identify and
properly address relevant revenue recognition considerations.
- Implementation of an enhanced fixed assets accounting and control system.
The Company engaged Arthur Andersen LLP as its new independent accountants
as of December 9, 1997. During the two most recent fiscal years prior to fiscal
year 1998 and through December 9, 1997, neither the Company, nor anyone on the
Company's behalf, consulted with Arthur Andersen LLP regarding (1) the
application of accounting principles to a specified transaction, either
completed or proposed, or the type of audit opinion that might be rendered on
the Company's financial statements, or (2) any matter that was either the
subject matter of a disagreement or a reportable event.
23
<PAGE> 26
VOTE REQUIRED
Although it is not required to do so, the Board of Directors is submitting
its selection of the Company's independent auditors for ratification by the
stockholders at the Annual Meeting to ascertain the views of the stockholders
regarding such election. The affirmative vote of a majority of the shares of the
Common Stock present in person or represented by proxy at the Annual Meeting is
required to ratify the appointment of public accountants. Whether the proposal
is approved or defeated, the Board of Directors may reconsider its selection.
THE BOARD OF DIRECTORS RECOMMENDS YOU VOTE "FOR" THE RATIFICATION OF ARTHUR
ANDERSEN LLP AS INDEPENDENT AUDITORS AND PUBLIC ACCOUNTANTS OF THE COMPANY,
WHICH IS DESIGNATED AS PROPOSAL 5 ON THE ENCLOSED PROXY CARD.
ANNUAL REPORT
The Company's Annual Reports on Form 10-K for the years ended March 31,
1999 and March 31, 2000, including financial statements and schedules filed
therewith, as filed with the Securities and Exchange Commission, are being
mailed to stockholders along with this proxy statement.
STOCKHOLDER PROPOSALS
Stockholder proposals intended to be considered for inclusion in the proxy
statement for presentation at the Company's 2000 Annual Meeting of Stockholders
must be received at the Company's offices at 1640 S. Sepulveda Blvd., Suite 320,
Los Angeles, California 90025, no later than 120 days prior to the Company's
next Annual Meeting, for inclusion in the Company's proxy statement and form of
proxy relating to such meeting. All proposals must comply with applicable
Securities and Exchange Commission rules and regulations.
OTHER MATTERS
The Board of Directors is not aware of any other matter other than those
set forth in this proxy statement that will be presented for action at the
Annual Meeting. If other matters properly come before the Annual Meeting, the
persons named as proxies intend to vote the shares they represent in accordance
with their best judgment in the interest of the Company.
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ANNEX A
COYOTE NETWORK SYSTEMS, INC.
2000 EQUITY INCENTIVE PLAN
1. Purpose. The purpose of this 2000 Equity Incentive Plan (the "Plan") of
Coyote Network Systems, Inc., a Delaware corporation (the "Company"), is to
advance the interests of the Company and its shareholders by providing a means
to attract, retain, and reward directors, officers and other key employees and
consultants of the Company and its subsidiaries (including consultants providing
services of substantial value) and to enable such persons to acquire or increase
a proprietary interest in the Company, thereby promoting a closer identity of
interests between such persons and the Company's shareholders.
2. Definitions. The definitions of awards under the Plan, including
Options, SARs, Restricted Stock, Deferred Stock, Stock granted as a bonus or in
lieu of other awards, Dividend Equivalents, and Other Stock-Based Awards, are
set forth in Section 6 of the Plan. Such awards, together with any other right
or interest granted to a Participant under the Plan, are termed "Awards." For
purposes of the Plan, the following additional terms shall be defined as set
forth below:
(a) "Award Agreement" means any written agreement, contract, or other
instrument or document evidencing an Award.
(b) "Beneficial Ownership" and "Beneficial Owner" shall have the
meanings ascribed to such terms in Rule 13d-3 under the Exchange Act.
(c) "Beneficiary" shall mean the person, persons, trust, or trusts
that have been designated by a Participant in his or her most recent
written beneficiary designation filed with the Committee to receive the
benefits specified under this Plan upon such Participant's death or, if
there is no designated Beneficiary or surviving designated Beneficiary,
then the person, persons, trust, or trusts entitled by will or the laws of
descent and distribution to receive such benefits.
(d) "Board" means the Board of Directors of the Company.
(e) A "Change in Control" shall be deemed to have occurred if:
(i) any person, other than the Company or an employee benefit plan
of the Company, acquires directly or indirectly the Beneficial Ownership
(as defined in Section 13(d) of the Securities Exchange Act of 1934, as
amended) of any voting security of the Company and immediately after
such acquisition such Person is, directly or indirectly, the Beneficial
Owner of voting securities representing 50% or more of the total voting
power of all of the then-outstanding voting securities of the Company;
(ii) the stockholders of the Company shall approve a merger,
consolidation, recapitalization, or reorganization of the Company, a
reverse stock split of outstanding voting securities, or consummation of
any such transaction if stockholder approval is not sought or obtained,
other than any such transaction which would result in at least 50% of
the total voting power represented by the voting securities of the
surviving entity outstanding immediately after such transaction being
Beneficially Owned by at least 50% of the holders of outstanding voting
securities of the Company immediately prior to the transaction, with the
voting power of each such continuing holder relative to other such
continuing holders not substantially altered in the transaction; or
(iii) the stockholders of the Company shall approve a plan of
complete liquidation of the Company or an agreement for the sale or
disposition by the Company of all or a substantial portion of the
Company's assets (i.e., 50% or more of the total assets of the Company).
(f) "Code" means the Internal Revenue Code of 1986, as amended from
time to time. References to any provision of the Code shall be deemed to
include regulations thereunder and successor provisions and regulations
thereto.
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(g) "Committee" means (i) the Compensation Committee of the Board, or
such other Board committee as may be designated by the Board to administer
the Plan, provided, however, that, to the extent necessary to comply with
Rule 16b-3, such committee shall consist of two or more directors, each of
whom is a "disinterested person" within the meaning of Rule 16b-3, or (ii)
in the absence of any such committee, the Board.
(h) "Exchange Act" means the Securities Exchange Act of 1934, as
amended from time to time. References to any provision of the Exchange Act
shall be deemed to include rules and regulations thereunder and successor
provisions and rules and regulations thereto.
(i) "Fair Market Value" means, with respect to Stock, Awards, or other
property, the fair market value of such Stock, Awards, or other property
determined by such methods or procedures as shall be established from time
to time by the Committee; provided, however, that if the Stock is listed on
a national securities exchange or quoted in an automated quotation system,
the Fair Market Value of such Stock on a given date shall be based upon the
last sales price or, if unavailable, the average of the closing bid and
asked prices per share of the Stock on such date (or, if there was no
trading or quotation in the Stock on such date, on the next preceding date
on which there was trading or quotation) as provided by one of such
organizations.
(j) "ISO" means any Option intended to be and designated as an
incentive stock option within the meaning of Section 422 of the Code.
(k) "Non-Employee Director" shall mean a member of the Board who is
not otherwise an employee of the Company or any subsidiary.
(l) "Participant" means a person who, at a time when eligible under
Section 5 hereof, has been granted an Award under the Plan.
(m) "Rule 16b-3" means Rule 16b-3, as from time to time in effect and
applicable to the Plan and Participants, promulgated by the Securities and
Exchange Commission under Section 16 of the Exchange Act.
(n) "Stock" means the Common Stock, $1.00 par value, of the Company
and such other securities as may be substituted for Stock or such other
securities pursuant to Section 4 hereof.
3. Administration.
(a) Authority of the Committee. The Plan shall be administered by the
Committee. All expenses of administering the Plan shall be borne by the Company.
The Committee shall have full and final authority to take the following actions,
in each case subject to and consistent with the provisions of the Plan:
(i) to select Participants to whom Awards may be granted;
(ii) to determine the type or types of Awards to be granted to each
Participant;
(iii) to determine the number of Awards to be granted, the number of
shares of Stock to which an Award will relate, the terms and conditions of
any Award granted under the Plan (including, but not limited to, any
exercise price, grant price, or purchase price, any restriction or
condition, any schedule for lapse of restrictions or conditions relating to
transferability or forfeiture, exercisability, or settlement of an Award,
and waivers or accelerations thereof, and waivers of or modifications to
performance conditions relating to an Award, based in each case on such
considerations as the Committee shall determine), and all other matters to
be determined in connection with an Award;
(iv) to determine whether, to what extent, and under what
circumstances an Award may be settled, or the exercise price of an Award
may be paid, in cash, Stock, other Awards, or other property, or an Award
may be cancelled, forfeited, or surrendered;
(v) to determine whether, to what extent, and under what circumstances
cash, Stock, other Awards, or other property payable with respect to an
Award will be deferred either automatically, at the election of the
Committee, or at the election of the Participant;
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(vi) to prescribe the form of each Award Agreement, which need not be
identical for each Participant;
(vii) to adopt, amend, suspend, waive, and rescind such rules and
regulations and appoint such agents as the Committee may deem necessary or
advisable to administer the Plan;
(viii) to correct any defect or supply any omission or reconcile any
inconsistency in the Plan and to construe and interpret the Plan and any
Award, rules and regulations, Award Agreement, or other instrument
hereunder; and
(ix) to make all other decisions and determinations as may be required
under the terms of the Plan or as the Committee may deem necessary or
advisable for the administration of the Plan.
(b) Manner of Exercise of Committee Authority. Unless authority is
specifically reserved to the Board under the terms of the Plan, the Company's
Articles of Incorporation or Bylaws, or applicable law, the Committee shall have
sole discretion in exercising authority under the Plan. Any action of the
Committee with respect to the Plan shall be final, conclusive, and binding on
all persons, including the Company, subsidiaries of the Company, Participants,
any person claiming any rights under the Plan from or through any Participant,
and shareholders. The express grant of any specific power to the Committee, and
the taking of any action by the Committee, shall not be construed as limiting
any power or authority of the Committee. The Committee may delegate to officers
of the Company or any subsidiary the authority, subject to such terms as the
Committee shall determine, to perform administrative functions and, with respect
to Participants not subject to Section 16 of the Exchange Act, to perform such
other functions as the Committee may determine, to the extent permitted under
Rule 16b-3, if applicable, and other applicable law.
(c) Limitation of Liability. Each member of the Committee shall be entitled
to, in good faith, rely or act upon any report or other information furnished to
him by any officer or other employee of the Company or any subsidiary, the
Company's independent certified public accountants, or any executive
compensation consultant, legal counsel, or other professional retained by the
Company to assist in the administration of the Plan. To the extent permitted by
applicable law and the Company's Articles of Incorporation, as they may be
amended from time to time, no member of the Committee, nor any officer or
employee of the Company acting on behalf of the Committee, shall be personally
liable for any action, determination, or interpretation taken or made in good
faith with respect to the Plan, and all members of the Committee and any officer
or employee of the Company acting on their behalf shall be fully indemnified and
protected by the Company with respect to any such action, determination, or
interpretation.
4. Stock Subject to Plan.
(a) Amount of Stock Reserved. The total amount of Stock that may be subject
to outstanding Award, shall not exceed 4,000,000 shares. Shares subject to
Awards of Options, Restricted Stock or Deferred Stock shall not be deemed
delivered if such Awards are forfeited, expire or otherwise terminate without
delivery of shares to the Participant and may be reallocated to other Awards
granted under the Plan. If an Award valued by reference to Stock may only be
settled in cash, the number of shares to which such Award relates shall be
deemed to be Stock subject to such Award for purposes of this Section 4(a). Any
shares of Stock delivered pursuant to an Award may consist, in whole or in part,
of authorized and unissued shares.
(b) Adjustments. In the event of any dividend or other distribution
(whether in the form of cash, Stock, or other property), recapitalization,
forward or reverse split, reorganization, merger, consolidation, spin-off,
combination, repurchase, or share exchange, or other similar corporate
transaction or event affecting the Stock, then (i) the number and kind of shares
of Stock deemed to be available thereafter for grants of Awards under Section
4(a) (including with respect to the limitations relating to Options and to
Restricted and Deferred Stock) shall be proportionately adjusted, (ii) the
number and kind of shares of Stock that may be delivered or deliverable in
respect of outstanding Awards shall be proportionately adjusted, and (iii) the
exercise price, grant price, or purchase price relating to any Award shall be
adjusted as the Committee shall determine to be equitably required. In addition,
the Committee is authorized to make adjustments in the terms and conditions of,
and the criteria included in, Awards (including, without limitation, cash
payments in exchange for an Award or substitution of Awards using stock of a
successor or other entity) in recognition of
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unusual or nonrecurring events (including, without limitation, events described
in the preceding sentence) affecting the Company or any subsidiary or the
financial statements of the Company or any subsidiary, or in response to changes
in applicable laws, regulations, or accounting principles. Notwithstanding the
foregoing, no adjustments shall be authorized under this Section 4(c) with
respect to ISOs or SARs in tandem therewith to the extent that such authority
would cause the Plan to violate Section 422(b)(1) of the Code, and no such
adjustment shall be authorized with respect to Options or other Awards granted
in accordance with Section 7(f) hereof to the extent that such authority would
cause such Options or other Awards to fail to qualify as "performance-based
compensation" under Section 162(m)(4)(C) of the Code and regulations thereunder
(including Regulation 1.162-27(e)(2)).
5. Eligibility. Directors, executive officers and other key employees of
the Company and its subsidiaries and persons who provide consulting or other
services to the Company deemed by the Committee to be of substantial value to
the Company are eligible to be granted Awards under the Plan. In addition, a
person who has been offered employment by the Company or its subsidiaries is
eligible to be granted an Award under the Plan, provided that such Award shall
be cancelled if such person fails to commence such employment, and no payment of
value may be made in connection with such Award until such person has commenced
such employment.
6. Specific Terms of Awards.
(a) General. Awards may be granted on the terms and conditions set forth in
this Section 6. In addition, the Committee may impose on any Award or the
exercise thereof, at the date of grant or thereafter (subject to Section 8(e)
hereof), such additional terms and conditions, not inconsistent with the
provisions of the Plan, as the Committee shall determine, including terms
requiring forfeiture of Awards in the event of termination of employment or
service of the Participant.
(b) Options. The Committee is authorized to grant Options to Participants
(including "reload" options automatically granted to offset specified exercises
of options) on the following terms and conditions:
(i) Exercise Price. The exercise price per share of Stock purchasable
under an Option shall be determined by the Committee, but in most cases
will be the Fair Market Value at the date of the grant of the Option.
(ii) Time and Method of Exercise. The Committee shall determine the
time or times at which an Option may be exercised in whole or in part, the
methods by which such exercise price may be paid or deemed to be paid, the
form of such payment, including, without limitation, cash, Stock, other
Awards or awards granted under other Company plans, or other property
(including notes or other contractual obligations of Participants to make
payment on a deferred basis, such as through "cashless exercise"
arrangements, to the extent permitted by applicable law), and the methods
by which Stock will be delivered or deemed to be delivered to Participants.
(iii) ISOs. The Committee may designate at the time that an Option is
granted to an employee of the Company or any subsidiary whether the Option
is to be treated as an ISO or a nonstatutory stock option. In the absence
of any such designation, an Option granted to any such employee shall be
treated as a nonstatutory stock option. The terms of any ISO granted under
the Plan shall comply in all respects with the provisions of Section 422 of
the Code, including, without limitation, the requirements that no ISO shall
be granted more than ten years after the effective date of the Plan and
that no ISO shall be granted to any Participant if it would cause the
aggregate Fair Market Value of the Stock with respect to which ISOs are
exercisable by that Participant for the first time during any calendar year
to exceed $100,000. Notwithstanding anything contained in the Plan to the
contrary, no term of the Plan relating to ISOs shall be interpreted,
amended, or altered, nor shall any discretion or authority granted under
the Plan be exercised, so as to disqualify either the Plan or any ISO under
Section 422 of the Code.
(iv) Termination of Employment. Except as otherwise determined by the
Committee, upon termination of a Participant's employment or service with
the Company and its subsidiaries (as determined under criteria established
by the Committee), such Participant may exercise any Option during the
three month period following such termination of employment, but only to
the extent that such
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Option was exercisable immediately prior to such termination of employment.
Notwithstanding the foregoing, if the Committee determines that such
termination is for cause, all Options held by the Participant shall
immediately terminate.
(c) Stock Appreciation Rights. The Committee is authorized to grant SARs to
Participants on the following terms and conditions:
(i) Right to Payment. An SAR shall confer on the Participant to whom
it is granted a right to receive, upon exercise thereof, the excess of (A)
the Fair Market Value of one share of Stock on the date of exercise (or, if
the Committee shall so determine in the case of any such right other than
one related to an ISO, the Fair Market Value of one share at any time
during a specified period before or after the date of exercise) over (B)
the grant price of the SAR as determined by the Committee as of the date of
grant of the SAR, which, except as provided in Section 7(a) hereof, shall
be not less than the Fair Market Value of one share of Stock on the date of
grant.
(ii) Other Terms. The Committee shall determine the time or times at
which an SAR may be exercised in whole or in part, the method of exercise,
the method of settlement, the form of consideration payable in settlement,
the method by which Stock will be delivered or deemed to be delivered to
Participants, and any other terms and conditions of any SAR (subject to
Section 7(b) hereof). Limited SARs that may only be exercised upon the
occurrence of a Change in Control may be granted on such terms, not
inconsistent with this Section 6(c) hereof, as the Committee may determine.
(d) Restricted Stock. The Committee is authorized to grant Restricted Stock
to Participants on the following terms and conditions:
(i) Grant and Restrictions. Restricted Stock shall be subject to such
restrictions on transferability and other restrictions, if any, as the
Committee may impose, which restrictions may lapse separately or in
combination at such times, under such circumstances, in such installments,
or otherwise, as the Committee may determine. Except to the extent
restricted under the terms of the Plan and any Award Agreement relating to
the Restricted Stock, a Participant granted Restricted Stock shall have all
of the rights of a stockholder including, without limitation, the right to
vote Restricted Stock and the right to receive dividends thereon.
(ii) Forfeiture. Except as otherwise determined by the Committee, upon
termination of employment or service with the Company and its subsidiaries
(as determined under criteria established by the Committee) during the
applicable restriction period, all Restricted Stock that is at that time
subject to restrictions shall be forfeited and reacquired by the Company;
provided, however, that the Committee may provide in any Award Agreement,
or may determine in any individual case, that restrictions or forfeiture
conditions relating to Restricted Stock will be waived in whole or in part
in the event of termination resulting from specified causes.
Notwithstanding anything contained in the Plan to the contrary (other than
Section 7(g) hereof), all Awards of Restricted Stock, other than an Award
granted pursuant to Section 7(f) hereof, shall be forfeited upon a
Participant's termination of employment or other service with the Company
and its subsidiaries within three years of the date the award is granted,
provided, however, that the Committee may make exceptions in the event such
termination is by reason of the Participant's death or disability.
(iii) Certificates for Stock. Restricted Stock granted under the Plan
may be evidenced in such manner as the Committee shall determine. If
certificates representing Restricted Stock are registered in the name of
the Participant, such certificates shall bear an appropriate legend
referring to the terms, conditions, and restrictions applicable to such
Restricted Stock, the Company shall retain physical possession of the
certificate, and the Participant shall have delivered a stock power to the
Company, endorsed in blank, relating to the Restricted Stock.
(iv) Dividends. Dividends paid, as determined by the Committee, on
Restricted Stock shall be either paid at the dividend payment date in cash
or in shares of unrestricted Stock having a Fair Market Value equal to the
amount of such dividends, or the payment of such dividends shall be
deferred and/or the amount or value thereof automatically reinvested in
additional Restricted Stock, other Awards, or
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other investment vehicles, as the Committee shall determine or permit the
Participant to elect. Stock distributed in connection with a Stock split or
Stock dividend, and other property distributed as a dividend, shall be
subject to restrictions and a risk of forfeiture to the same extent as the
Restricted Stock with respect to which such Stock or other property has
been distributed.
(e) Deferred Stock. The Committee is authorized to grant Deferred Stock to
Participants on the following terms and conditions:
(i) Award and Restrictions. Delivery of Stock will occur upon
expiration of the deferral period specified for an Award of Deferred Stock
by the Committee (or, if permitted by the Committee, as elected by the
Participant). In addition, Deferred Stock shall be subject to such
restrictions as the Committee may impose, if any, which restrictions may
lapse at the expiration of the deferral period or at earlier specified
times, separately or in combination, in installments, or otherwise, as the
Committee may determine.
(ii) Forfeiture. Except as otherwise determined by the Committee, upon
termination of employment or service with the Company and its subsidiaries
(as determined under criteria established by the Committee) during the
applicable deferral period or portion thereof to which forfeiture
conditions apply (as provided in the Award Agreement evidencing the
Deferred Stock), all Deferred Stock that is at that time subject to
deferral (other than a deferral at the election of the Participant) shall
be forfeited; provided, however, that the Committee may provide in any
Award Agreement, or may determine in any individual case, that restrictions
or forfeiture conditions relating to Deferred Stock will be waived in whole
or in part in the event of termination resulting from specified causes.
Notwithstanding anything contained in the Plan to the contrary (other than
Section 7(g) hereof), all Awards of Deferred Stock, other than an Award
granted pursuant to Section 7(f) hereof, shall be forfeited upon a
Participant's termination of employment or other service with the Company
and its subsidiaries within three years of the date the award is granted;
provided, however, that the Committee may make exceptions in the event such
termination is by reason of the Participant's death or disability.
(f) Bonus Stock and Awards in Lieu of Cash Obligations. The Committee is
authorized to grant Stock as a bonus, or to grant Stock or other Awards in lieu
of Company obligations to pay cash under other plans or compensatory
arrangements, provided that, in the case of Participants subject to Section 16
of the Exchange Act, such cash amounts are determined under such other plans in
a manner that complies with applicable requirements of Rule 16b-3 so that the
acquisition of Stock or Awards hereunder shall be exempt from Section 16(b)
liability. Stock or Awards granted hereunder shall be subject to such other
terms as shall be determined by the Committee.
(g) Dividend Equivalents. The Committee is authorized to grant Dividend
Equivalents to a Participant, entitling the Participant to receive cash, Stock,
other Awards, or other property equal in value to dividends paid with respect to
a specified number of shares of Stock, or other periodic payments. The Committee
may provide that Dividend Equivalents shall be paid or distributed when accrued
or shall be deemed to have been reinvested in additional Stock, Awards, or other
investment vehicles as the Committee may specify.
(h) Other Stock-Based Awards. The Committee is authorized, subject to
limitations under applicable law, to grant to Participants such other Awards
that may be denominated or payable in, valued in whole or in part by reference
to, or otherwise based on, or related to, Stock, as deemed by the Committee to
be consistent with the purposes of the Plan, including, without limitation,
convertible or exchangeable debt securities, other rights convertible or
exchangeable into Stock, purchase rights for Stock, Awards with value and
payment contingent upon performance of the Company or any other factors
designated by the Committee, and Awards valued by reference to the book value of
Stock or the value of securities of or the performance of specified
subsidiaries. The Committee shall determine the terms and conditions of such
Awards. Stock delivered pursuant to an Award in the nature of a purchase right
granted under this Section 6(h) shall be purchased for such consideration, paid
for at such times, by such methods, and in such forms, including, without
limitation, cash, Stock, other Awards, or other property, as the Committee shall
determine. Cash awards, as an element of or supplement to any other Award under
the Plan, shall also be authorized pursuant to this Section 6(h).
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7. Certain Provisions Applicable to Awards.
(a) Stand-Alone, Additional, Tandem, and Substitute Awards. Awards granted
under the Plan may, in the discretion of the Committee, be granted either alone
or in addition to, in tandem with, or in substitution for, any other Award
granted under the Plan or any award granted under any other plan of the Company,
any subsidiary, or any business entity to be acquired by the Company or a
subsidiary, or any other right of a Participant to receive payment from the
Company or any subsidiary. Awards granted in addition to or in tandem with other
Awards or awards may be granted either as of the same time as or a different
time from the grant of such other Awards or awards.
(b) Term of Awards. The term of each Award shall be for such period as may
be determined by the Committee; provided, however, that in no event shall the
term of any ISO or an SAR granted in tandem therewith exceed a period of ten
years from the date of its grant (or such shorter period as may be applicable
under Section 422 of the Code).
(c) Form of Payment Under Awards. Subject to the terms of the Plan and any
applicable Award Agreement, payments to be made by the Company or a subsidiary
upon the grant or exercise of an Award may be made in such forms as the
Committee shall determine, including, without limitation, cash, Stock, other
Awards, or other property, and may be made in a single payment or transfer, in
installments, or on a deferred basis. Such payments may include, without
limitation, provisions for the payment or crediting of reasonable interest on
installment or deferred payments or the grant or crediting of Dividend
Equivalents in respect of installment or deferred payments denominated in Stock.
(d) Rule 16b-3 Compliance. It is the intent of the Company that this Plan
comply in all respects with applicable provisions of Rule 16b-3 or Rule
16a-1(c)(3) under the Exchange Act in connection with any grant of Awards to or
other transaction by a Participant who is subject to Section 16 of the Exchange
Act (except for transactions exempted under alternative Exchange Act rules or
acknowledged in writing to be non-exempt by such Participant). Accordingly, if
any provision of this Plan or any Award Agreement relating to an Award does not
comply with the requirements of Rule 16b-3 or Rule 16a-1(c)(3) as then
applicable to any such transaction, such provision will be construed or deemed
amended to the extent necessary to conform to the applicable requirements of
Rule 16b-3 or Rule 16a-1(c)(3) so that such Participant shall avoid liability
under Section 16(b). In addition, notwithstanding other provisions of the Plan,
the exercise price of any Award carrying a right to exercise granted to a
Participant subject to Section 16 of the Exchange Act shall be not less than 50%
of the Fair Market Value of Stock as of the date that such Award is granted if
such pricing limitation is required under Rule 16b-3 at the time of such grant.
(e) Loan Provisions. With the consent of the Committee, and subject at all
times to, and only to the extent, if any, and in accordance with, laws and
regulations and other binding obligations or provisions applicable to the
Company, the Company may make, guarantee, or arrange for a loan or loans to a
Participant with respect to the exercise of any Option or other payment in
connection with any Award, including the payment by a Participant of any or all
federal, state, or local income or other taxes due in connection with any Award.
Subject to such limitations, the Committee shall have full authority to decide
whether to make a loan or loans hereunder and to determine the amount, terms,
and provisions of any such loan or loans, including, without limitation, the
interest rate to be charged in respect of any such loan or loans, whether the
loan or loans are to be with or without recourse against the borrower, the terms
on which the loan is to be repaid and conditions, if any, under which the loan
or loans may be forgiven.
(f) Performance-Based Awards to "Covered Employees". Notwithstanding other
provisions of the Plan, the provisions of this Section 7(f) shall apply to any
Award the exercisability or settlement of which is subject to the achievement of
performance conditions (other than an Option or SAR granted with an exercise or
base price at least equal to 100% of the Fair Market Value of Stock on the date
of grant) if such Award is granted to a person who, at the time of grant, is a
"covered employee." The definition of "covered employee," and other terms used
in this Section 7(f), shall be interpreted in a manner consistent with Section
162(m) of the Code and regulations thereunder (including Regulation 1.162-27).
The performance objectives for an Award subject to this Section 7(f) shall
consist of one or more business criteria and a targeted level or levels of
performance with respect to such criteria, as specified by the Committee but
subject to this Section 7(f).
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Performance objectives shall be objective and shall otherwise meet the
requirements (including the shareholder approval requirements) of Section
162(m)(4)(C) of the Code and regulations thereunder (including Regulation
1.162-27(e)(2)). The following business criteria may be used by the Committee in
connection with a performance objective:
(1) Annual earnings before payment of taxes and interest;
(2) Annual earnings per share; and/or
(3) Annual return on common equity.
Achievement of performance objectives shall be measured over a period of one,
two, three, or four years, as specified by the Committee. No business criteria
other than those named above may be used in establishing the performance
objective for an Award to a covered employee. For each such Award relating to a
covered employee, the Committee shall establish the targeted level or levels of
performance for each business criteria. Performance objectives may differ for
Awards under this Section 7(f) to different covered employees. The Committee may
determine that an Award under this Section 7(f) shall be payable upon
achievement of any one of the performance objectives or may require that two or
more of the performance objectives must be achieved in order for an Award to be
payable. The Committee may, in its discretion, reduce the amount of a payout
otherwise to be made in connection with an Award under this Section 7(f), but
may not exercise discretion to increase such amount, and the Committee may
consider other performance criteria in exercising such discretion. All
determinations by the Committee as to the achievement of performance objectives
shall be made in writing. The Committee may not delegate any responsibility
under this Section 7(f).
(g) Acceleration Upon a Change of Control. Notwithstanding anything
contained herein to the contrary, unless otherwise provided by the Committee in
an Award Agreement, all conditions and/or restrictions relating to the continued
performance of services and/or the achievement of performance objectives with
respect to the exercisability or full enjoyment of an Award shall immediately
lapse upon a Change in Control.
8. General Provisions.
(a) Compliance With Legal and Exchange Requirements. The Company shall not
be obligated to deliver Stock upon the exercise or settlement of any Award or
take other actions under the Plan until the Company shall have determined that
applicable federal and state laws, rules, and regulations have been complied
with and such approvals of any regulatory or governmental agency have been
obtained and contractual obligations to which the Award may be subject have been
satisfied. The Company, in its discretion, may postpone the issuance or delivery
of Stock under any Award until completion of the listing for trading and
quotation on any stock exchange or automated quotation system or registration or
qualification of such Stock or other required action under any federal or state
law, rule, or regulation as the Company may consider appropriate, and may
require any Participant to make such representations and furnish such
information as it may consider appropriate in connection with the issuance or
delivery of Stock under the Plan.
(b) Transferability. Except as otherwise provided by the Committee, Awards
and other rights of Participants under the Plan may not be transferred to third
parties, pledged, mortgaged, hypothecated, or otherwise encumbered, and may not
be subject to claims of creditors, except as designated by the Participant by
will or by the laws of descent and distribution (or pursuant to a Beneficiary
designation).
(c) No Right to Continued Employment or Service. Neither the Plan nor any
action taken hereunder shall be construed as giving any employee or person
providing consulting or other services to the Company and its subsidiaries the
right to be retained in the employ or service of the Company or any of its
subsidiaries, nor shall it interfere in any way with the right of the Company or
any of its subsidiaries to terminate any employee's employment or terminate any
contract with a person providing consulting or other services at any time.
A-8
<PAGE> 35
(d) Taxes.
(i) The Company and its subsidiaries are authorized to withhold from
any Award granted or to be settled, any payment relating to an Award under
the Plan, including from a distribution of Stock, or any payroll or other
payment to a Participant, amounts of withholding and other taxes due or
potentially payable in connection with any transaction involving an Award,
and to take such other action as the Committee may deem advisable to enable
the Company and Participants to satisfy obligations for the payment of
withholding taxes and other tax obligations relating to any Award. This
authority shall include authority to withhold or receive Stock or other
property and to make cash payments in respect thereof in satisfaction of a
Participant's tax obligations.
(ii) In the event that any amounts paid to a Participant pursuant to
Section 2(d) hereof (the "Change in Control Payments") shall be subject to
the tax imposed by Section 4999 of the Code ("Excise Tax"), an additional
amount (the "Gross-up Amount") shall be paid by the Company to such
Participant such that the net amount retained by the Participant, after
deduction of any Excise Tax on the payment provided for by this Section
8(d)(2), shall be equal to the Change in Control Payments. The provision of
this Section 8(d)(2) shall survive any termination of such Participant's
employment or service with the Company and its subsidiaries and shall
continue in effect until expiration of the statute of limitations for
filing of tax returns that include the period in which any Change in
Control Payments are made or, if earlier, final determination of tax
liability relating thereto. Payment of the Gross-up Amount shall be made in
accordance with the computation thereof by the accountant to such
Participant in connection with preparation of the Participant's tax return
for the relevant tax year, and shall be adjusted upon final determination
of tax liability, with any increase therein being paid by the Company to
the Participant or decrease therein being paid by the Participant to the
Company within 30 days following the date of final determination of tax
liability.
(e) Changes to the Plan and Awards. The Board may amend, alter, suspend,
discontinue, or terminate the Plan or the Committee's authority to grant Awards
under the Plan without the consent of shareholders or Participants, except that
any such action shall be subject to the approval of the Company's shareholders
at or before the next annual meeting of shareholders for which the record date
is after such Board action if such stockholder approval is required by any
federal or state law or regulation or the rules of any stock exchange or
automated quotation system on which the Stock may then be listed or quoted, and
the Board may otherwise, in its discretion, determine to submit other such
changes to the Plan to shareholders for approval; provided, however, that,
without the consent of an affected Participant, no such action may materially
impair the rights of such Participant under any Award theretofore granted to
him. The Committee may waive any conditions or rights under, or amend, alter,
suspend, discontinue, or terminate, any Award theretofore granted and any Award
Agreement relating thereto; provided, however, that, without the consent of an
affected Participant, no such action may materially impair the rights of such
Participant under such Award or Award Agreement. Notwithstanding the foregoing,
the Board may make any such amendment to cause the Plan or an Award to qualify
for an exemption under Rule 16b-3 without the consent of a Participant.
(f) No Rights to Awards; No Stockholder Rights. No Participant, employee,
or other person shall have any claim to be granted any Award under the Plan, and
there is no obligation for uniformity of treatment of Participants, employees,
and other persons. No Award shall confer on any Participant any of the rights of
a stockholder of the Company unless and until Stock is duly issued or
transferred and delivered to the Participant in accordance with the terms of the
Plan and the Award.
(g) Unfunded Status of Awards; Creation of Trusts. The Plan is intended to
constitute an "unfunded" plan for incentive and deferred compensation. With
respect to any payments not yet made to a Participant pursuant to an Award,
nothing contained in the Plan or any Award shall give any such Participant any
rights that are greater than those of a general creditor of the Company;
provided, however, that the Committee may authorize the creation of trusts or
make other arrangements to meet the Company's obligations under the Plan to
deliver cash, Stock, other Awards, or other property pursuant to any Award,
which trusts or other arrangements shall be consistent with the "unfunded"
status of the Plan unless the Committee otherwise determines with the consent of
each affected Participant.
A-9
<PAGE> 36
(h) Nonexclusivity of the Plan. Neither the adoption of the Plan by the
Board nor its submission to the shareholders of the Company for approval shall
be construed as creating any limitations on the power of the Board to adopt such
other incentive arrangements as it may deem desirable, including, without
limitation, the granting of stock options otherwise than under the Plan, and
such arrangements may be either applicable generally or only in specific cases.
(i) No Fractional Shares. No fractional shares of Stock shall be issued or
delivered pursuant to the Plan or any Award. The Committee shall determine
whether cash, other Awards, or other property shall be issued or paid in lieu of
such fractional shares or whether such fractional shares or any rights thereto
shall be forfeited or otherwise eliminated.
(j) Compliance With Code Section 162(m). It is the intent of the Company
that Options and other Awards subject to the performance objectives specified
under Section 7(f) hereof granted under the Plan to persons who are "covered
employees" within the meaning of Code Section 162(m) and regulations thereunder
(including Regulation 1.162-27(c)(2)) shall constitute "qualified
performance-based compensation" within the meaning of Code Section 162(m) and
regulations thereunder (including Regulation 1.162-27(e), and subject to the
transition rules under Regulation 1.162-27(h)(2)) thereunder. Accordingly, if
any provision of the Plan or any Award Agreement relating to such an Award
granted to a "covered employee" does not comply or is inconsistent with the
requirements of Code Section 162(m) or regulations thereunder, such provision
shall be construed or deemed amended to the extent necessary to conform to such
requirements, and no provision shall be deemed to confer upon the Committee or
any other person discretion to increase the amount of compensation otherwise
payable to a "covered employee" in connection with any such Award upon
attainment of the performance objectives.
(k) Governing Law. The validity, construction, and effect of the Plan and
any Award Agreement shall be determined in accordance with the laws of Delaware,
without giving effect to principles of conflicts of laws and applicable federal
law.
(l) Effective Date; Plan Termination. The Plan shall become effective as of
the date of its adoption by the Board and shall continue in effect until
terminated by the Board.
A-10
<PAGE> 37
PROXY
COYOTE NETWORK SYSTEMS, INC.
ANNUAL MEETING OF STOCKHOLDERS - JULY 27, 2000.
THIS PROXY IS SOLICITED BY THE BOARD OF DIRECTORS OF THE COMPANY.
The undersigned stockholder of Coyote Network Systems, Inc. ("Company") hereby
constitutes and appoints James R. McCullough and Daniel W. Latham and each of
them, his true and lawful attorneys and proxies, with full power of substitution
in and for each of them, to vote all shares of the Company which the undersigned
is entitled to vote at the Annual Meeting of Stockholders to be held at the
Hilton Hotel LAX, 5711 West Century Blvd., Los Angeles, California 90045, on
July 27, 2000 at 11:00 a.m., Pacific Daylight Time, or at any postponement or
adjournment thereof, on any and all proposals contained in the Notice of the
Annual Meeting of Stockholders, with all of the powers the undersigned would
possess if present personally at said meeting, or at any postponement or
adjournment thereof.
THIS PROXY WHEN PROPERLY EXECUTED WILL BE VOTED IN THE MANNER DIRECTED HEREIN BY
THE UNDERSIGNED STOCKHOLDER. IF NO DIRECTION IS MADE, THIS PROXY WILL BE VOTED
FOR THE NOMINEE LISTED ON THE REVERSE SIDE AND FOR THE APPROVAL OF PROPOSALS 2,
3, 4 AND 5.
(CONTINUED AND TO BE SIGNED AND DATED ON THE REVERSE SIDE)
-------------
SEE REVERSE
SIDE
-------------
<PAGE> 38
[X] Please mark your votes
as in this example
<TABLE>
<CAPTION>
FOR All nominees listed
(except as marked to WITHHOLD AUTHORITY
the contrary, see to vote for all nominees
instruction below) listed at right.
<S> <C> <C> <C>
1. Election of [ ] [ ]
Directors NOMINEES: Daniel W. Latham
INSTRUCTION: To withhold authority to vote for any
individual nominee, line through the
name of the nominee above.
</TABLE>
THE DIRECTORS RECOMMEND A VOTE FOR THE NOMINEE AND PROPOSALS 2, 3, 4 AND 5.
<TABLE>
<CAPTION>
FOR AGAINST ABSTAIN
<S> <C> <C> <C>
2. Proposal to approve and amend the [ ] [ ] [ ]
Company's Restated Certificate of Incorporation
to increase the authorized shares of capital
stock from 35,000,000 to 80,000,000 shares.
3. Proposal to approve the adoption of the [ ] [ ] [ ]
2000 Equity Incentive Plan.
4. Proposal to amend the Company's [ ] [ ] [ ]
Restated Certificate of Incorporation to
change the Company's name to Quentra
Networks, Inc.
5. Proposal to ratify Arthur Andersen LLP as [ ] [ ] [ ]
independent auditors.
Plan to attend meeting [ ]
</TABLE>
The above named proxies are granted the authority, in their discretion, to act
upon such other matters as may properly come before the meeting or any
postponement or adjournment thereof.
SIGNATURE(S)_________________________________ Dated:________, 2000
Please sign exactly as your name appears in the records of the Company and
return this proxy immediately in the enclosed stamped self-addressed envelope.
