Document:

Exhibit 10(d)

Exhibit 10(d)

 

FIRST AMENDMENT

Dated as of February 1, 2000

to

RECEIVABLES SALE AGREEMENT

Dated as of December 17, 1999

     This Amendment (the
"Amendment"), dated as of February 1, 2000, is entered
into among Blue Hill, Inc. (the "Seller"), Bergen Brunswig
Drug Company, as the Initial Collection Agent (the "Collection
Agent"), Wachovia Bank, N.A., as the Agent and as the Blue Ridge
Purchaser Agent (the "Agent"), the Related Bank Purchasers
(the "Related Bank Purchasers") from time to time party
thereto, Blue Ridge Asset Funding Corporation ("Blue Ridge"),
as a Conduit Purchaser and the other Conduit Purchasers from time to time party
thereto (together with Blue Ridge and the Related Bank Purchasers, the
"Purchasers").

     Reference is hereby made to
that certain Receivables Sale Agreement, dated as of December 17, 1999
(as amended, supplemented or otherwise modified through the date hereof, the
"Sale Agreement"), among the Seller, the Collection Agent,
Blue Ridge, the other Purchasers and the Agent.  Terms used herein and not
otherwise defined herein which are defined in the Sale Agreement or the other
Transaction Documents (as defined in the Sale Agreement) shall have the same
meaning herein as defined therein.

     For good and valuable
consideration, the receipt and adequacy of which are hereby acknowledged, the
parties hereto hereby agree as follows:

     Section 1.
  Subject to the following terms and conditions, including without
limitation the conditions precedent set forth in Section 2, upon execution by
the parties hereto in the space provided for that purpose below, the Sale
Agreement shall be, and it hereby is, amended as follows:

	
(a)
	 	
Section 1.1(d) of the Sale
Agreement is  hereby  amended  and  as  so
amended

	
shall be restated in its entirety
to read as follows:

	 	
On  each  day 
before  the   Termination 
Date  that  any Collections

	
are received by the Collection
Agent and no Interim Liquidation is in effect, a Purchaser's Purchase Interest
in such Collections shall automatically be used to make a Reinvestment Purchase
by such Purchaser. The parties hereto agree, however, that to the extent that
the aggregate Commitments of the Blue Ridge Purchaser Group have not otherwise
been reduced to or below $153,000,000 on or prior to February 29, 2000,
that the Blue Ridge Purchaser Agent may at any time thereafter provide notice
to the Agent, each other Purchaser Agent, the Seller and the Collection Agent
that it elects to cause the Reinvestment Purchases of Purchasers in the Blue
Ridge Purchaser Group (but not those of any other Purchasers) to cease until
such time that the aggregate Investment of the Blue Ridge Purchaser Group is
less than or equal to $150,000,000, at which time, subject to Section 7.2,
its Reinvestment Purchases shall automatically recommence.

	
(b)
	 	
Section 1.1(e) is hereby amended
and as so amended shall be restated in its

	
entirety to read as follows:

	 	
Security Interest. To
secure all of the Seller's obligations under

	
the Transaction Documents, the
Seller hereby grants to the Agent (for the benefit of the Purchasers and any
other Person to whom any amount is owed hereunder) a security interest in all
of the Seller's rights (if any) in the Receivables, the Related Security, the
Collections, and the Lock- Box Accounts and all proceeds of the foregoing as
well as all of the Seller's rights under the Purchase Agreement.

	
(c)
	 	
Section 1.6 of the Sale
Agreement is hereby amended by adding the following

	
immediately at the end of such
Section:

	 	
In addition, upon a reduction of
the Investment of the Blue Ridge

	
Purchaser Group to or below
$150,000,000 pursuant to Section 1.1(d), the Commitments of the Related
Bank Purchasers in the Blue Ridge Purchaser Group shall automatically be
ratably reduced to an aggregate amount equal to $153,000,000.

	
(d)
	 	
Section 2.3(a) is hereby
amended and as so amended shall be restated in its 

	
Entirety to read as follows:

	 	
Non-Reinvestment Periods.
On each day during a period that a

	
Purchaser in the Blue Ridge
Purchase Group is not making Reinvestment Purchases (as established under
Section 1.1(d)), the Collection Agent (i) shall set aside and hold
solely for the benefit of the applicable Purchasers (or deliver to the
applicable Purchaser Agent, if so instructed pursuant to Section 
3.2(a)) each such Purchaser's Purchase Interest in all Collections received
on such day and (ii) shall distribute on the last day of each Tranche
Period to the applicable Purchaser Agent (for the benefit of such Purchaser)
the amounts so set aside up to the amount of such Purchaser's Purchase Amount
and, to the extent not already paid in full, all Discount thereon and all other
amounts then due from the Seller in connection with such Purchase Amount and
Tranche Period.  As provided in Section 1.4(c) all Discount and other
amounts payable hereunder other than the Purchase Amount are payable by the
Seller.  If any part of the Sold Interest in any Collections is applied to pay
any such amounts pursuant to this Section 2.3(a) and after giving effect
to such application the Sold Interest is greater than 100%, the Seller shall
pay to the Collection Agent the amount so applied to the extent necessary so
that after giving effect to such payment the Sold Interest is no greater than
100%, for distribution as part of the Purchase Interest in Collections.

 

	
(e)
	 	
The opening paragraph of Section 2.3(b) of
the Sale Agreement is hereby 

	
amended by striking the phrase
"the Sold Interest in" appearing in the fifth line thereof.

	
(f)
	 	
Subsections 2.3(b)(i) through (vi)
are amended and as so amended shall be

	
restated in their entirety to read
as follows:

	
(i)
	
  first, ratably
to each Purchase Group until all Discount due but

	
not already paid to each Purchaser
Group under the Transaction Document, has been paid in full; and

	
(ii)
	
  second, ratably to each
Purchaser Group until all Purchase 

	
Amounts of each Purchaser Group
under the Transaction Documents has been paid in full; and

	
(iii)
	
  third, ratably
to each Purchaser Group until all amounts owed

	
 under the Transaction Documents
to such Purchaser Group have been paid in full.

	
(iv)
	
  fourth, to the
Agent until all amounts owed under the transaction

	
Documents to such Person have been
paid in full;

	
(v)
	
  fifth, to each
Purchaser Agent until all amounts owed under the

	
Transaction Documents to such
Persons have been paid in full;

	
(vi)
	
  sixth, to any
other Person to whom any amounts are owed

	
under the Transaction Documents
until all such amounts have been paid in full; and

	
(vii)
	
  seventh, to the
Seller (or as otherwise required by applicable

	
law).

	
 (g)
	 	
The third sentence of Section 3.1(a)
of the Sale Agreement is hereby

	
amended by adding the phrase "
and each Purchaser Agent" immediately following the phrase "prior
written notice to the Agent" in each place it occurs in such sentence.

	
(h)
	 	
Section 5.1(i) of the Sale
Agreement is hereby amended by adding the phrase

	
"and each Purchaser Agent"
immediately following the word "Agent" appearing in the third line of
the second to last sentence of such Section and in the last sentence of such
Section.

	
(i)
	 	
Section 5.1 of the Sale Agreement
is hereby amended by adding the following

	
new subsection (n) immediately
following subsection (m) thereof:

	
(n)
	
Restricted Payments by the
Seller.  The Seller will not purchase

	
or redeem any shares of the
capital stock of the Seller, declare or pay dividends thereon (other than
stock dividends), or make any distribution to stockholders or set aside any
funds for any such purpose; provided, however, the foregoing shall not
prevent the Seller from paying cash dividends on the Settlement Date, after
making any payment required to be made by the Seller on such Settlement Date
in accordance with the last sentence of Section 2.3(a) and Section 2.3(b) if,
after giving effect to such payment, the Seller's net worth (as determined in
accordance with GAAP) would not be less than 3% of the Purchase Limit.

	
(j)
	 	
Schedule I to the Sale Agreement is
hereby amended by adding the following

	
defined terms in their proper
alphabetical order:

	 	
"Adjusted Dilution
Ratio" means, at any time, the average of

	
the Dilution Ratio for each of
the 12 most recently completed calendar months.

	 	
"Aggregate
Reserve" means, at any time at which such amount

	
is calculated, the greater of (a)
the sum of the Loss Reserve, Dilution Reserve and Discount Reserve and (b) the
Required Reserve Floor.

	 	
"Dilution Horizon
Ratio" means, as of any date, an amount 

	
calculated by dividing the
aggregate sales of the Originator for the most recent calendar month by the
aggregate outstanding balance of the Net Receivables Balance as of the last
day of the most recent calendar month.

	 	
"Dilution Volatility
Component" means an amount (expressed

	
as a percentage) equal to the
product of (a) the difference between (i) the highest three month rolling
average Dilution Ratio over the past 12 months and (ii) the Adjusted
Dilution Ratio and (b) a fraction, the numerator of which is the highest
three month rolling average Dilution Ratio during the past 12 months and
the denominator of which is the Adjusted Dilution Ratio.

	 	
"Liberty Street"
means Liberty Street Funding Corp., a 

	
Delaware corporation.

	 	
"Liberty Street Committed
Purchasers" means the Related

	
Bank Purchasers for
Liberty Street.

	 	
"Liberty Street Purchaser
Agent" means The Bank of Nova 

	
Scotia.

	 	
"Liberty Street Purchaser
Group" means Liberty Street and the

	
Liberty Street Committed
Purchasers.

	 	
"Required Reserve
Floor" means, at any time, the product of

	
(a) 29% and (b) the Net Receivables
Balance at such time.

	
(k)
	 	
The defined term
"Concentration Limit" appearing in Schedule I to the Sale
 

	
Agreement is hereby deleted and
replaced with the following:

	 	
"Concentration Limit"
means, with respect to any Obligor, the

	
percentage of the Eligible
Receivable Balance set forth in the table below based upon the short-term
unsecured debt rating (or, in the absence of such rating, the equivalent
long-term unsecured senior debt rating) currently assigned to them by S&P
and Moody's, (and, if such Obligor is rated by both agencies and has a split
rating (except for an A-1+/P-1 rating), the applicable rating will be the
lower of the two), (or, if larger, the Special Limit applicable to such
Obligor):

	

S&P RATING
	

MOODY'S RATING
	
ALLOWABLE % OF

ELIGIBLE

RECEIVABLES

	

A-1+
	

P-1
	

10%

	

A-1
	

P-1
	

8%

	

A-2
	

P-2
	

6%

	

A-3
	

P-3
	

3%

	
Below A-3 or Not Rated by either
S&P or Moody's
	
Below P-3 or Not Rated by either
S&P or Moody's
	
2%

	 	
If an Obligor has neither a
long-term unsecured debt rating nor a

	
short-term unsecured debt rating by
either S&P or Moody's, that Obligor's Concentration Limit will be 2% of the
Eligible Receivables Balance.

	
(l)
	 	
The defined term "Default
Ratio" appearing in Schedule I to the Sale

	
Agreement is hereby deleted and
replaced with the following:

	 	
"Default Ratio"
means the ratio (expressed as a percentage)

	
for any calendar month of (a) the
outstanding balance of all Defaulted Receivables at the end of the most recently
completed calendar month to (b) the outstanding balance of all Receivables at
the end of such calendar month.

	
(m)
	 	
The defined term
"Dilution Ratio" appearing in Schedule I to the Sale

	
Agreement is amended in its
entirety to read as follows:

	 	
"Dilution Ratio"
means, as of any date, an amount (expressed

	
as a percentage) equal to a
fraction, (i) the numerator of which is the aggregate amount of payments
owed by the Seller pursuant to the first sentence of Section 1.5(b) hereof
during the previous calendar month, and (ii) the denominator of which
is the amount of sales generated by the Originator during the previous
calendar month.

	
(n)
	 	
The defined term "Dilution
Reserve" appearing in Schedule I to the Sale 

	
Agreement is hereby deleted and
replaced with the following:

	 	
"Dilution Reserve"
 means, at any time, the product of (a) the

	
greater of (i) 6%, and (ii) three
times the highest Dilution Ratio (expressed as a decimal) as of the last day of
each of the most recently completed twelve full calendar months for which a
Periodic Report is required to have been delivered and (iii) an amount
(expressed as a percentage) equal to the product of (A) the sum of (i)
2 times the Adjusted Dilution Ratio and (II) the Dilution Volatility
Component and (B) the Dilution Horizon Ratio multiplied by (b) the Net
Receivables Balance at such time.

	
(o)
	 	
The defined term "Eligible
Receivable" appearing in Schedule I to the Sale 

	
Agreement is hereby amended by
adding the following subsection immediately after subsection (x) thereof and
correcting the punctuation appropriately:

	
"(xi)
	
for all Obligors with Special
Limits and for each of the ten

	
Obligors with the largest
outstanding balances of Receivables, not more than 25% of the aggregate
outstanding balance of all Receivables of such Obligor of which are Defaulted
Receivables."

	
(p)
	 	
The defined term "
Instructing Group" appearing in Schedule I to the Sale 

	
is amended in its entirety to read
as follows:

	 	
"Instructing Group"
means all Purchaser Agents representing

	
Purchaser Groups.

	
(q)
	 	
The defined term "
Purchase Limit" appearing in Schedule I to the Sale

	
Agreement is amended in its
entirety to read as follows:

	 	
"Purchase Limit" 
means $300,000,000.

	
(r)
	 	
The defined term "
Reserve Percentage" appearing in Schedule I to the Sale 

	
Agreement is amended in its
entirety to read as follows:

	 	
"Reserve Percentage"
means, at any time, the quotient

	
obtained by dividing (a) the
Aggregate Reserve by (b) the Net Receivables Balance.

	
(s)
	 	
The defined term "
Special Limit" appearing in Schedule I of the Sale

	
Agreement is amended in its
entirety to be and to read as follows:

	 	
"Special Limit"
means, (i) for National Rx, Inc., ("National Rx")

	
a wholly owned subsidiary of
Merck-Medco Managed Care, Inc., a wholly owned subsidiary of Merck & Co.,
Inc. ("Merck"), 15% of the Eligible Receivables Balance,
provided, however, that such Special Limit shall be automatically deemed
revoked (A) at the time, if any, when Merck ceases to have a short-term
unsecured senior debt rating of higher than "A-2" from S&P and a
short-term unsecured senior debt rating of higher than "P-2" from
Moody's or (B) National Rx shall cease at any time to be, directly or
indirectly, a wholly owned subsidiary of Merck, (ii) for Longs Drug Stores
Corporation ("Longs"), 10% of the Eligible Receivables
Balance; provided, however, that such Special Limit shall be
automatically deemed revoked at the time, if any, when the sum of Delinquent
Receivables and Defaulted Receivables to Longs exceeds 50% of the total
outstanding balance of Receivables to Longs, unless in the case of either
(i) or (ii), the Agent, at the direction of the Instructing Group, notifies
the Seller of a different limit, (iii) for Walgreen Company, 12% of the
Eligible Receivables Balance; provided, however, that such Special Limit
shall be deemed automatically revoked at any time, if any, when Walgreen
Company ceases to have a short-term unsecured senior debt rating of higher
than "A-2" from S&P and a short-term unsecured senior debt rating
of higher than "P-2" from Moody's, and (iv) such other "
Special Limits" as shall be agreed to in writing by the Instructing
Group for other Obligors from time to time and approved by the required
Rating Agencies.  If the Special Limit for National Rx is revoked as
indicated in subsection (i)(A) of this definition, the Concentration
Limit for National Rx will be based on the Merck short-term unsecured senior
debt ratings and the associated Concentration Limits in the table appearing in
such definition.  If the Special Limit for National Rx is revoked as indicated
in subsection (i)(B) of this definition, the Concentration Limit for
National Rx will be based on the short-term unsecured senior debt ratings of
National Rx and the associated Concentration Limits in the table appearing in
such definition.  If the Special Limit for any other Obligor is revoked at any
time, such Obligor's Concentration Limit will be based on its short-term
unsecured senior debt rating per the table appearing in the definition of
"Concentration Limit."

	
(t)
	 	
The defined term "
Termination Date" appearing in Schedule I to the Sale 

	
Agreement is hereby amended by
(i) adding the phrase "and each Purchaser Agent" immediately
following the word "Agent" appearing in subsection (a) thereof
and (ii) amending subsection (c) thereof in its entirety to read
"January 30, 2001."

	
(u)
	 	
The defined term "
Termination Event" appearing in Schedule I to the Sale 

	
Agreement shall be amended
as follows:

	
(1)
	 	
Subsection (f) of such definition
is amended in its entirety

	
to read as follows:

	
(f)
	
(i)
	
 the Delinquency Ratio exceeds
3.75%, (ii) (a) the

	
Default Ratio exceeds 8.00% or (b)
the average of the Default Ratio for any three consecutive calendar months
exceeds 6.75% (iii) the average of the Dilution Ratio for any three
consecutive calendar months exceeds 6.0%, (iv) the Loss-to Liquidation
Ratio at the end of any calendar month measured for the three month period then
ending exceeds 0.5%, (v) the Turnover Ratio exceeds 20 days, or (vi) 
the Coverage Ratio exceeds 100%; or

	
(2)
	 	
Subsection (i) of such definition
is amended in its entirety

	
to read as follows:

	
(i)
	 	
the Parent's long-term unsecured,
unsubordinated

	
indebtedness is rated less than BB
by S&P (or such rating is withdrawn or suspended) or less than Ba2 by
Moody's (or such rating is withdrawn or suspended);

	
(3)
	 	

The following subsection (m) is inserted immediately 

	
following subsection (l) with
appropriate punctuation corrections:

	
(m)
	 	
there shall have occurred any event
which materially

	
adversely impairs in the reasonable
judgment of the Agent the ability of the Initial Collection Agent to originate
Receivables of a credit quality which are at least of the credit quality of the
Receivables included in the initial Purchase, or any other event occurs that is
reasonably likely to have a Material Adverse Effect.

	
(v)
	 	

Schedule II to the Sale Agreement is amended in its entirety to read
as set

	
forth on Exhibit A attached
hereto.

	
(w)
	 	
     The
Sale Agreement shall be amended to add a new Exhibit A-1 following

	
Exhibit A as set forth on
Exhibit B attached hereto.

	
(x)
	 	
The last paragraph of Schedule I to the Sale
Agreement is amended by

	
adding the following sentence
immediately at the end thereof:

	 	
"Any reference in the Sale
Agreement to any agreement, 

	
document, writing or other similar
instrument shall be deemed to include a reference to any permissible amendment,
restatement or other modification thereto."

      Section 2.
  Section 1 of this Amendment shall become effective only once
the Agent has received, in form and substance satisfactory to the Agent, all
documents and certificates as the Agent may reasonably request, executed
counterparts of this Amendment and such other documents and certificates,
confirmation from the Rating Agencies that this Amendment will not adversely
effect the Ratings and all other matters incident to the execution hereof are
satisfactory to the Agent.

     Section 3.  
The Sale Agreement, as amended and supplemented hereby or as contemplated herein,
and all rights and powers created thereby and thereunder or under the other
Transaction Documents and all other documents executed in connection therewith,
are in all respects ratified and confirmed.  From and after the date hereof,
the Sale Agreement shall be amended and supplemented as herein provided, and,
except as so amended and supplemented, the Sale Agreement, each of the other
Transaction Documents and all other documents executed in connection therewith
shall remain in full force and effect.

     Section 4.  
This Amendment may be executed in two or more counterparts, each of which shall
constitute an original but both or all of which, when taken together, shall
constitute but one instrument.

     Section 5.  
This Amendment shall be governed and construed in accordance with the internal
laws of the State of New York.

 

 

 

 

     In Witness Whereof, the parties
have caused this Amendment to be executed and delivered by their duly authorized
officers as of the date first above written.

 

	 	
WACHOVIA BANK, N.A., as the
Related Bank

	 	 	
Purchaser for Blue Ridge, as the
Blue 

	 	 	
Ridge Purchaser and as Agent

	 	 	 	 
	 	
By:
	 	 
	
	
	

	 	
Title:
	 	 
	 	 	

	 	 	 	 
	 	
BLUE RIDGE ASSET FUNDING CORPORATION,

	 	 	
as a Conduit Purchaser

	 	 	 	 
	 	
By:  
	
WACHOVIA BANK, N.A., as
attorney-in-fact

	 	 	 	 
	 	 	 	 
	 	 	
By:
	 
	
	
	
	

	 	 	
Title:
	 
	 	 	 	

	 	 	 	 
	 	

BLUE HILL, INC., as Seller

	 	 	 	 
	 	 	 	 
	 	
By:
	 	 
	
	
	

	 	
Title:
	 	 
	 	 	

	 	 	 	 
	 	

BERGEN BRUNSWIG DRUG COMPANY, as Initial

	 	 	
Collection Agent

	 	 	 	 
	 	 	 	 
	 	
By:
	 	 
	
	
	

	 	
Title:
	 	 
	 	 	

	 	 	 	 
	 	
THE BANK OF NOVA SCOTIA,
as the Related

	 	 	
Bank Purchaser for Liberty
Street, and as 

	 	 	
the Liberty Street
Purchaser Agent

	 	 	 	 
	 	 	 	 
	 	
By:
	 	 
	
	
	

	 	
Title:
	 	 
	 	 	

	 	 	 	 

 

	 	
LIBERTY STREET FUNDING CORP., as a 

	 	 	
Conduit Purchaser

	 	 	 	 
	 	 	 	 
	 	
By:
	 	 
	
	
	

	 	
Title:
	 	 
	 	 	

 

 

 

EXHIBIT A TO THE FIRST AMENDMENT TO

RECEIVABLE SALE AGREEMENT

SCHEDULE II

RELATED BANK PURCHASERS AND

PURCHASE COMMITMENTS OF RELATED BANK PURCHASERS

AND PURCHASER GROUPS

 

	 	
NAME OF RELATED BANK 
	
COMMITMENTS OF RELATED

	
CONDUIT PURCHASER
	
PURCHASER
	
BANK PURCHASERS

	

	 	 	 
	
Blue Ridge
	
Wachovia Bank, N.A.
	
$204,000,000

	 	 	 
	
Liberty Street
	
The Bank of Nova Scotia
	
$102,000,000

 

PURCHASER GROUP COMMITMENTS

	
PURCHASER GROUP
	
COMMITMENT

	 	 
	
Blue Ridge Purchaser Group

	
$204,000,000

	 	 
	
Liberty  Street Purchaser Group

	
$102,000,000

 

 

 

 

 

EXHIBIT B

TO

THE FIRST AMENDMENT TO RECEIVABLES SALE AGREEMENT

EXHIBIT A-1

FORM OF INCREMENTAL PURCHASE REQUEST

____________, 2000

	
The Bank of Nova Scotia,
as Purchaser

	
Agent for the Liberty
Street Purchaser Group

	 
	

	

	 	 
	
Attn:
	 
		

Re:     Receivables Sale Agreement
dated as of December 17, 1999 (the "Sale Agreement"),
among Blue Hill, Inc., as Seller, Bergen Brunswig Drug Company, as Initial
Collection Agent,

Wachovia Bank, N.A., as Agent, the Purchaser Agents from time
to time party thereto and the Purchasers thereunder

 

Ladies and Gentlemen:

The undersigned Seller under the above-referenced Sale
Agreement hereby confirms it has requested an Incremental Purchase of
$___________ by the Conduit Purchasers under the Sale Agreement. 
[In the event a Conduit Purchaser is unable or unwilling to make the requested
Incremental Purchase, the Seller hereby requests an Incremental Purchase of
$____________ by the Related Bank Purchasers for such Conduit Purchaser under
the Sale Agreement at the [Eurodollar Rate with a Tranche Period of _______
months.] [Prime Rate]].

Attached hereto as Schedule I is information
relating to the proposed Incremental Purchase required by the Sale Agreement.
If on the date of this Incremental Purchase Request ("Notice"),
an Interim Liquidation is in effect, this Notice revokes our request for such
Interim Liquidation so that Reinvestment Purchases shall immediately commence
in accordance with Section 1.1(d) of the Sale Agreement.

 

The Seller hereby certifies that both before and after
giving effect to [each of] the proposed Incremental Purchase[s]
contemplated hereby and the use of the proceeds therefrom, all of the
requirements of Section 7.2 of the Sale Agreement have been satisfied.

 

 

 

	 	
Very truly yours,

	 	 	
BLUE HILL, INC.

	 	 	 	 
	 	 	 	 
	 	
By:
	 	 
	
	
	
	

	 	
Title:
	 	 
	 	 	 	

 

 

 

 

SCHEDULE I

TO

INCREMENTAL PURCHASE REQUESTS

SUMMARY OF INFORMATION RELATING TO PROPOSED SALE(S)

	 	
1.
	
Dates, Amounts, Purchaser(s),
Proposed Tranche Periods

	 	 	 	 	 	 	 	 	 	 	 
	
A1
	
Date of Notice
	 	 	 	 	 	 	 	 
	 	 	 	 	 	 	 	 	 	 	

	
A2
	
Measurement Date (the last
	 	 	 	 	 	 	 	 
	 	
Business Day of the month
	 	 	 	 	 	 	 	 
	 	
immediately preceding the
	 	 	 	 	 	 	 	 
	 	
month in which the Date of
	 	 	 	 	 	 	 	 
	 	
Notice occurs)
	 	 	 	 	 	 	 	 
	 	 	 	 	 	 	 	 	 	 	

	
A3
	
Proposed Purchase Dates
	 	 	 	 	 	 	 	 
	 	
(each of which is a
	 	
	 	
	 	
	 	

	 	
Business Day)
	 	 	 	 	 	 	 	 
	 	 	 	 	 	 	 	 	 	 	 
	
A4
	
Respective Proposed
	 	 	 	 	 	 	 	 
	 	
Incremental Purchase on
	 	 	 	 	 	 	 	 
	 	
each such Purchase Date
	
$
	 	
$
	 	
$
	 	
$
	 
	
	
	
	
	
	
	
	
	
	

	 	
(each Incremental
	 	

  (A4A)	 	

  (A4B)	 	

  (A4C)	 	

  (A4D)
	 	
Purchase must be in a
	 	 	 	 	 	 	 	 
	 	
minimum amount of
	 	 	 	 	 	 	 	 
	 	
$1,000,000 and multiples
	 	 	 	 	 	 	 	 
	 	
thereof, or, if less, an
	 	 	 	 	 	 	 	 
	 	
amount equal to the
	 	 	 	 	 	 	 	 
	 	
Maximum Incremental
	 	 	 	 	 	 	 	 
	 	
Purchase Amount)
	 	 	 	 	 	 	 	 
	 	 	 	 	 	 	 	 	 	 	 
	
A5
	
Proposed Allocation
	 	 	 	 	 	 	 	 
	 	
among Purchasers (Pro Rata)
	 	 	 	 	 	 	 	 
	 	
Conduit Purchasers
	 	 	 	 	 	 	 	 
	 	 	 	 	 	 	 	 	 	 	 
	 	 	
Name of
	 	 	 	 	 	 	 	 
	 	 	
Related Bank
	 	 	 	 	 	 	 	 
	 	 	
Purchaser
	
$
	 	
$
	 	
$
	 	
$
	 
	
	
	
	

	
	

	
	

	
	

	 	 	 	 	 	 	 	 	 	 	 
	
A6
	
Used Aggregate
	 	 	 	 	 	 	 	 
	 	
Commitment Amount
	 	 	 	 	 	 	 	 
	 	
(after such Incremental Purchases)
	 	 	 	 	
$
	 
	 	 	 	 	 	 	 	 	 	 	

 

	 	
Each proposed Purchase Date must be
a Business Day and must occur no later than two weeks after the Measurement Date
set forth above.  The choice of Measurement Date is a risk undertaken by the
Seller.  If a selected Measurement Date is not the applicable Purchase Date, the
Seller's choice and disclosure of such date shall not in any manner diminish or
waive the obligation of the Seller to assure the Purchasers that, after giving
effect to the proposed Purchase, the actual Sold Interest as of the date of such
proposed Purchase does not exceed 100%.Coyote Network Systems, Inc.
                          ----------------------------

                             SUBSCRIPTION AGREEMENT

Coyote Network Systems, Inc.
4360 Park Terrace Drive
Westlake Village, California 91361
Attn:  James J. Fiedler, Chairman and CEO

Ladies and Gentlemen:

1.   Subscription. The undersigned is hereby purchasing from Coyote Network
     Systems, Inc., a Delaware corporation (the "Company"), ___________ shares
     of preferred stock (the "Shares") convertible into shares of the Company's
     common stock, par value $1.00 per share (the "Common Stock"), at a
     conversion price of $4.75 per share. The aggregate purchase price for such
     Shares is $ ________ (the "Purchase Price"). This Subscription is being
     made in connection with the Company's private placement of the Shares
     solely to "Accredited Investors" as that term is defined in Section 501(a)
     of Regulation D under the Securities Act of 1933 (the "Act")(the
     "Offering"). The terms of the Offering are more specifically described on
     Annex A hereto.

2.   Closing. On the date hereof (the "Closing"), payment of the Purchase Price
     is being made by electronic wire transfer in accordance with the following
     instructions:

           Bank Name:
           ABA #:
           Credit:
           Account #:

           Further Credit:
           Account #:
           Attention:

or by delivery of a bank check or certified check made payable to "Coyote
Network Systems, Inc. Escrow Account," in either case against delivery to the
undersigned of a certificate representing the Shares. All checks should be
delivered, together with an executed copy of this Subscription Agreement, to
Sunrise Securities Corp., the Placement Agent for this Offering as follows:

           Sunrise Securities Corp.
           135 East 57th Street
           11th floor
           New York, New York
           Attention: Preston Tsao, Head of Corporate Finance

<PAGE>
3.   Representations and Warranties of the Company. To induce the undersigned to
     enter into this Agreement and to purchase the Shares, the Company hereby
     represents and warrants to the undersigned the following:

     (1)  Organization Standing, Etc. The Company is a corporation duly
          organized, validly existing and in good standing under the laws of the
          State of Delaware and has the requisite corporate power and authority
          to own or lease its properties and to carry on its business as it is
          now being conducted. The Company has the requisite corporate power and
          authority to issue the Shares and, upon conversion the underlying
          Common Stock (the "Underlying Shares") and to perform its obligations
          under this Subscription Agreement.

     (2)  Valid Issuance. The Shares, when issued and delivered pursuant to
          terms of this Subscription Agreement, will be duly authorized, validly
          issued and enforceable in accordance with their respective terms and
          the terms of this Subscription Agreement and the Underlying Shares,
          will upon conversion of the Shares in accordance with their terms, be
          duly authorized, validly issued, fully paid and non-assessable.

     (3)  Corporate Acts and Proceedings. This Subscription Agreement and the
          Offering have been duly authorized by all necessary corporate action
          on behalf the Company. This Subscription Agreement has been duly
          executed and delivered by authorized officers of the Company, is a
          valid and binding agreement on the part of the Company and is
          enforceable against the Company in accordance with its terms. All
          corporate actions necessary to the authorization, creation, issuance
          and delivery of the Shares and the conducting of the Offering have
          been taken by the Company.

     (4)  Compliance with Applicable Laws and Other Instruments. Neither the
          execution or delivery of, nor the performance of or compliance with
          this Subscription Agreement, the issuance of the Shares nor the
          consummation of the transactions contemplated hereby and thereby will,
          with or without the giving of notice or passage of time, result in any
          material breach of, or constitute a material default under, or result
          in the imposition of any material lien or encumbrance upon any asset
          or property of the Company pursuant to any material agreement or other
          instrument to which the Company is a party or by which it or any of
          its properties, assets or rights is bound or affected, and will not
          violate the Company's Certificate of Incorporation or Bylaws.

     (5)  Securities Laws. Based in part upon the representations of the
          undersigned in Section 5 hereof, no consent, authorization, approval,
          permit or order of or filing with any governmental or regulatory
          authority is required under current laws and regulations in connection
          with the execution and delivery of this Agreement or the offer,
          issuance, sale or delivery of the Shares, other than (i) the filing of
          a Form D pursuant to Regulation D under the Securities Act of 1933, as
          amended (the "Act"); (ii) the filing, if required, of any notice with
          any state whose laws require such filing; and (iii) the qualification
          thereof, if required, under other applicable state laws, which
          qualification has been or will be effected as a condition of the
          Offering. Under the circumstances contemplated by this Subscription
          Agreement, the offer, issuance, sale and delivery of the Shares will
          not, under current laws and regulations, require compliance with the
          prospectus delivery or registration requirements in the Act.
<PAGE>
     (6)  Capital Stock. The authorized capital stock of the Company consists of
          30,000,000 shares of common stock, par value $1.00 per share (the
          "Common Stock") of which 14,919,311 shares are issued and outstanding
          as of January 26, 2000, and 5,000,000 shares of preferred stock, par
          value $.01 per share (the "Preferred Stock"). There are 434 shares of
          Series A Convertible Preferred Stock outstanding. Other than the
          Series A Preferred Stock, there are no other shares of Preferred Stock
          outstanding. As of January 26, 2000, the Company has reserved for
          issuance 8,452,607 shares of Common Stock underlying the Series A
          Preferred Stock, options (including options available for grant under
          existing stock option plans), warrants and A and B Units of Coyote
          Technologies, LLC, and has also reserved 2,250,000 shares for issuance
          in connection with the contemplated settlement of certain class action
          litigation and 1,250,000 shares for issuance to a consultant pursuant
          to a consulting agreement. The issued and outstanding shares of
          capital stock of the Company are duly authorized, validly issued,
          fully paid and non-assessable. Except as described above and in the
          Company's Annual Report on Form 10-K for the fiscal year ended March
          31, 1999 (as amended by Amendments No. 1 and 2, the "Form 10-K"), the
          Quarterly Reports on Form 10-Q for the quarters ended June 30, 1999
          and September 30, 1999, the Current Reports on Form 8-K dated as of
          October 27, 1999 and November 18, 1999, and the Amendment to Current
          Report on Form 8-K dated as of October 27, 1999 (collectively, the
          "SEC Filings"), in each case as filed with the Securities and Exchange
          Commission (the "Commission"), there are no outstanding subscriptions,
          options, warrants, calls, contracts, demands, commitments, convertible
          securities or other agreements or arrangements of any character or
          nature whatever, other than in connection with the Offering, pursuant
          to which the Company is obligated to issue any securities of any kind
          representing an ownership interest in the Company. Neither the offer
          nor the issuance or sale of the Shares constitutes an event under any
          anti-dilution provisions of any securities issued (or issuable
          pursuant to outstanding rights, warrants or options) by the Company or
          any agreements with respect to the issuance of securities by the
          Company, which will either increase the number of securities issuable
          pursuant to such provisions or decrease the consideration per share to
          be received by the Company pursuant to such provisions. No holder of
          any securities of the Company is entitled to any preemptive or similar
          rights to purchase any securities of the Company in connection with
          the Offering.

     (7)  SEC Filings. The Company has furnished, or made available to the
          undersigned through the EDGAR Internet web site of the Commission, to
          the undersigned, true and complete copies of the SEC Filings and its
          Registration Statement on Form S-3, Registration No. 333-68333 (the
          "Form S-3"), including the risk factors ("Risk Factors") contained in
          such Form S-3. As of their respective filing dates, the SEC Filings
          complied in all material respects with the applicable requirements of
          the Securities Exchange Act of 1934, as amended (the "Exchange Act"),
          and the rules and regulations promulgated thereunder. None of the SEC
          Filings, as of their respective dates, and taken as a whole with the
          Risk Factors, contain any untrue statement of a material fact or omit
          to state a material fact required to be stated therein or necessary in
          order to make the statements made therein, in the light of the
          circumstances under which they were made, not misleading.

<PAGE>
4.   Transfer Restrictions.

     (1)  The undersigned realizes that the Shares and the Underlying Shares are
          not registered under the Act or any foreign or state securities laws.
          The undersigned agrees that the Shares and the Underlying Shares will
          not be sold, offered for sale, pledged, hypothecated or otherwise
          transferred (collectively, "Transfer"), except in compliance with the
          Act and applicable foreign and state securities laws. The undersigned
          understands that the undersigned can only Transfer the Shares and the
          Underlying Shares pursuant to registration under the Act or pursuant
          to an exemption therefrom. The undersigned understands that to
          Transfer the Shares and the Underlying Shares may require in certain
          jurisdictions specific approval by the appropriate governmental agency
          or commission in such jurisdiction. The undersigned has been advised
          that, except as set forth in Section 6 hereof, the Company has no
          obligation, and does not intend to cause the Shares and the Underlying
          Shares to be registered under the Act or the securities laws of any
          other jurisdiction or to comply with the requirements for any
          exemption under the Act, including but not limited to, those provided
          by Rule 144 and Rule 144A promulgated under the Act, or under the
          securities laws of any other jurisdiction.

     (2)  To enable the Company to enforce the Transfer restrictions contained
          in Section 4(a), hereof, the undersigned hereby consents to the
          placing of legends upon the certificates representing the Shares and
          the Underlying Shares, and the placing of stop transfer orders with
          the transfer agent of the Common Stock with respect to the Shares and
          the Underlying Shares.

5.   Representations and Warranties of the Undersigned. To induce the Company to
     accept the undersigned's subscription, the undersigned hereby represents
     and warrants to the Company that:

     (1)  the undersigned, if an individual, has reached the age of majority in
          the jurisdiction in which the undersigned resides, is a bona fide
          resident of the jurisdiction contained in the address set forth on the
          signature page of this Subscription Agreement, is legally competent to
          execute this Subscription Agreement, and does not intend to change
          residence to another jurisdiction;

     (2)  the undersigned, if an entity, is duly authorized to execute this
          Subscription Agreement and this Subscription Agreement, when executed
          and delivered by the undersigned, will constitute a legal, valid and
          binding obligation enforceable against the undersigned in accordance
          with its terms and that the execution, delivery and performance of
          this Subscription Agreement and the consummation of the transactions
          contemplated hereby have been duly authorized by all requisite
          corporate or other necessary action on the part of the undersigned;

     (3)  the Shares subscribed for hereby are being acquired by the undersigned
          for investment purposes only, for the account of the undersigned and
          not with the view to any resale or distribution thereof, and the
          undersigned is not participating, directly or indirectly, in a
          distribution of such Shares and will not take, or cause to be taken,
          any action that would cause the undersigned to be deemed an
          "underwriter" of such Shares as defined in Section 2(l1) of the Act;
<PAGE>
     (4)  the undersigned has had access to all materials, books, records,
          documents and information relating to the Company which the
          undersigned has requested, including the SEC Filings and has
          independently verified the accuracy of the information contained
          therein;

     (5)  the undersigned acknowledges and understands that investment in the
          Shares involves a high degree of risk, including without limitation,
          the risks set forth in the Form S-3 and other risks, including the
          possible reversal or adjustment of certain revenues recognized by the
          Company in prior periods, the Company's continued difficulty in
          obtaining lease financing in order to consummate equipment sales and
          breaches by third parties of equipment sales previously made, the
          Company's need for financing, the possible breach by the Company of
          certain contracts, including agreements to register securities with
          the SEC and failure to pay a promissory note, and the failure of
          several previously announced joint ventures, including the Telecom
          Alliance, to generate significant benefits, which may lead to their
          dissolution.

     (6)  the undersigned acknowledges that the undersigned has been offered an
          opportunity to ask questions of, and receive answers from, officers of
          the Company concerning all material aspects of the Company and its
          business and the Offering, and that any request, for such information
          has been fully complied with to the extent that the Company possesses
          such information or can acquire it without unreasonable effort or
          expense;

     (7)  the undersigned has such knowledge and experience in financial and
          business matters that the undersigned is capable of evaluating the
          merits and risks of an investment in the Company and can afford a
          complete loss of his investment in the Company;

     (8)  the undersigned has, in connection with its decision to purchase the
          Shares, relied solely upon the SEC Filings, the Risk Factors, the
          information disclosed herein and their own due diligence;

     (9)  the undersigned represents and warrants to and covenants with the
          Company that the undersigned has not engaged and will not engage in
          any sales of the Shares prior to the effectiveness of the Resale
          Registration Statement (as defined below in Section 6);

     (10) the undersigned recognizes that no governmental agency has passed upon
          the issuance of the Shares or made any finding or determination as to
          the fairness of this Offering;

     (11) if the undersigned is purchasing the Shares subscribed for hereby in a
          representative or fiduciary capacity, the representations and
          warranties contained herein shall be deemed to have been made on
          behalf of the person or persons for whom such Shares are being
          purchased;

     (12) the undersigned has not entered into any agreement to pay commissions
          to any persons with respect to the purchase or sale of the Shares,
          except commissions for which the undersigned will be responsible;
<PAGE>
     (13) the undersigned acknowledges that the Company will pay to Sunrise
          Securities Corp. ("Sunrise") a commission with respect to the sale of
          the Shares by the Company to the undersigned and the undersigned
          acknowledges that Sunrise has not engaged in an independent due
          diligence investigation of the Company and is relying solely on the
          Company's representations.

     (14) the undersigned is an "Accredited Investor" as that term is defined in
          Section 501(a) of Regulation D promulgated under the Act.
          Specifically, the undersigned is (check appropriate item(s)): [ ] (i)
          a bank as defined in Section 3(a)(2) of the Act, or a savings and loan
          association or other institution as defined in Section 3(a)(5)(A) of
          the Act, whether acting in its individual or fiduciary capacity; a
          broker or dealer registered pursuant to Section 15 of the Exchange
          Act; an insurance company as defined in Section 2(13) of the Act; an
          investment company registered under the Investment Company Act of 1940
          (the "Investment Company Act") or a business development company, as
          defined in Section 2(a)(48) of that Act; a small business investment
          company licensed by the U.S. Small Business Administration under
          Section 301(c) or (d) of the Small Business Investment Act of 1958; a
          plan established and maintained by a state, its political subdivisions
          or any agency or instrumentality of a state or its political
          subdivisions for the benefit of its employees, if such plan has total
          assets in excess of $5,000,000; or an employee benefit plan within the
          meaning of the Employment Retirement Income Security Act of 1974 if
          the investment decision is made by a plan fiduciary, as defined in
          Section 3(21) of such Act, which is either a bank, savings and loan
          association, insurance company, or registered investment advisor, or
          if the employee benefit plan has total assets in excess of $5,000,000
          or, if a self-directed plan, with investment decisions made solely by
          persons that are Accredited Investors;

 [  ]     (ii) a private business development company as defined in Section
          202(a)(22) of the Investment Advisers Act of 1940;

 [  ]     (iii)a corporation, Massachusetts or similar business trust, or
          partnership, or an organization described in Section 501(c)(3) of the
          Internal Revenue Code, not formed for the specific purpose of
          acquiring the Shares, with total assets in excess of $5,000,000;

 [  ]     (iv) a director or executive officer of the Company;

 [  ]     (v) a natural person whose  individual net worth, or joint net worth
          with that person's spouse, at the time of his or her purchase,
          exceeds $1,000,000;

 [  ]     (vi) a natural person who had an individual  income (not including his
          or her spouse's income) in excess of $200,000 in 1998 and 1999 or
          joint income with his or her  spouse  in  excess of $300,000 in each
          of those  years  and has a reasonable expectation of reaching such
          income level in 2000;

 [  ]     (vii) a trust, with total assets in excess of $5,000,000, not formed
          for the specific purpose of acquiring the Shares, whose purchase of

<PAGE>

          the Shares is directed by a person having such knowledge and
          experience in financial and business matters that he or she is capable
          of evaluating the merits and risks entailed in the purchase of the
          Shares; or

 [  ]     (viii) an entity in which all of the equity owners are Accredited
          Investors. (If this alternative is checked, the undersigned must
          identify each equity owner and provide statements signed by each;
          demonstrating how each is qualified as an Accredited Investor.)

     (15) the undersigned understands and acknowledges that the contents of any
          discussions with the Company's management and the matters included in
          the SEC Filings and the Risk Factors include "forward looking
          statements" within the meaning of the Private Securities Litigation
          Reform Act of 1995. As such, those statements involve known and
          unknown risks and uncertainties, which may cause the actual results in
          future periods to be materially different from any future performance
          the Company presently anticipates or predicts. The undersigned has
          been cautioned not to place undue reliance on any forward looking
          statements.

6.   Registration of Shares under the Act.

     (1)  By its acceptance hereof, the Company agrees that it shall, at its
          expense, (1) not later than 120 business days after the final closing
          of the Offering (the "Filing Deadline") use its best efforts to file a
          registration statement or amend an existing effective registration
          statement (in either case, the "Resale Registration Statement") with
          the Commission to register under the Act the resale by the undersigned
          of the Underlying Shares; (ii) use its best efforts to cause the
          Resale Registration Statement to become effective under the Act as
          soon as possible after it is filed; (iii) after the Resale
          Registration Statement is declared effective under the Act, furnish
          the undersigned with such number of copies of the final prospectus
          included in the Resale Registration Statement (the "Prospectus") as
          the undersigned may reasonably request to facilitate the resale of the
          Underlying Shares; and (iv) use its best efforts to cause such
          Registration Statement to remain effective until such time as the
          undersigned becomes eligible to resell the shares pursuant to Rule
          144(k) of the Act.

     (2)  The Company will (i) prepare and file with the Commission such
          amendments and Prospectus supplements, including post-effective
          amendments to the Resale Registration Statement, as the Company
          determines may be necessary or appropriate, and use its best efforts
          to have such post-effective amendments declared effective as promptly
          as practicable; (ii) cause the Prospectus to be supplemented by any
          Prospectus supplement, and as so supplemented, to be filed with the
          Commission; and (iii) promptly notify the undersigned when a
          Prospectus, and any Prospectus supplement or post-effective amendment
          must be filed or has been filed (including any filing in response to a
          Sale Notice) and, with respect to any post-effective amendment, when
          the same has become effective.

     (3)  In connection with the Resale Registration Statement, the undersigned
          shall furnish the Company such information as the Company shall
          reasonably request.

     (4)  The undersigned shall give the Company two business days prior written
          notice of any sale pursuant to the Resale Registration Statement. At

<PAGE>

          any time the Company may refuse to permit the undersigned to resell
          any Underlying Shares pursuant to the Resale Registration Statement;
          provided, however, that in order to exercise this right, the Company
          must deliver a certificate in writing to the undersigned to the effect
          that withdrawal of the Resale Registration Statement is necessary
          because a sale pursuant to the Resale Registration Statement in its
          then-current form could constitute a violation of the federal
          securities laws. In such an event, the Company shall use its best
          efforts to amend the Resale Registration Statement if necessary and
          take all other actions necessary to allow such sale under the federal
          securities laws, and shall notify the undersigned promptly after it
          has determined that such sale has become permissible under the federal
          securities laws. The undersigned hereby covenants and agrees that it
          will not sell any Underlying Shares pursuant to the Resale
          Registration Statement during the periods the Resale Registration
          Statement is withdrawn as set forth in this Section 6(d).

     (5)  If the Resale Registration Statement is not declared effective within
          180 days of the final closing of the Offering (the "Deadline"), the
          Company shall issue to the undersigned Shares or Common Stock, as
          appropriate, in an amount equal to 1% of the number of outstanding
          Shares or Underlying Shares held by the undersigned for each 30 day
          period or part thereof after the Deadline in which the Resale
          Registration Statement is not declared effective and, if such Resale
          Registration Statement is not effective within 60 days after the
          Deadline, the 1% shall be increased to 2% for each 30 day period or
          part thereof after such 60 day period elapses until the Resale
          Registration Statement is effective or the Underlying Shares become
          saleable pursuant to Rule 144(k).

7.   Indemnification.

     (1)  The undersigned understands the meaning and legal consequences of the
          representations and warranties made by the undersigned in this
          Subscription Agreement, and agrees to indemnify and hold harmless the
          Company and each of the Company's directors, officers, stockholders,
          employees, counsel, agents, successors and assignees from and against
          any and all losses, damages, liabilities or expenses (including,
          without limitation, attorneys' fees), as and when incurred, due to or
          arising out of (in such case in whole or in part) any breach of any
          representation or warranty made by the undersigned set forth herein or
          in any other agreement or other document furnished by the undersigned
          to any of the foregoing in connection with the Offering, or any
          failure by the undersigned to fulfill any of the covenants or
          agreements set forth herein, or arising out of the resale or
          distribution by the undersigned of the Underlying Shares or any
          portion thereof in violation of the Act or any applicable foreign or
          state securities or "blue sky" laws.

     (2)  The Company understands the meaning and legal consequences of the
          representations and warranties made by it in this Subscription
          Agreement, and agrees to indemnify and hold harmless the undersigned
          and each of the undersigned's directors, officers, stockholders,
          employees, counsel, agents, successors and assigns from and against
          any and all losses, damages, liabilities or expenses (including,
          without imitation, attorneys' fees), as and when incurred, due to or
          arising out of (in each case in whole or in part) any breach of any
          representation or warranty made by the Company set forth herein, or
          any failure by the Company to fulfill any of its covenants or
          agreements set forth herein.
<PAGE>
     (3)  To the extent permitted by law, the Company will indemnify and hold
          harmless each holder of Underlying Shares included in the Resale
          Registration Statement (a "Holder"), the directors, if any, of such
          Holder, the officers, if any, of such Holder, and each person, if any,
          who controls such Holder within the meaning of the Act or the Exchange
          Act, against, any losses, claims, damages, expenses or liabilities to
          which any of them may become subject, under the Act, the Exchange Act
          or otherwise, insofar as such losses, claims, damages, expenses or
          liabilities (or actions or proceedings, whether commenced or
          threatened, in respect thereof, arise out of or are based upon any of
          the following statements, omissions or violations (collectively, a
          "Violation"): (i) any untrue statement or alleged untrue statement of
          a material fact contained in the Resale Registration Statement,
          including any preliminary prospectus or final prospectus contained
          therein or any amendments or supplements thereto; (ii) the omission or
          alleged omission to state therein a material fact required to be
          stated therein, or necessary to make the statements therein, in light
          of the circumstances in which they were made, not misleading; or (iii)
          any violation or alleged violation by the Company of the Act, the
          Exchange Act, any state securities laws or any rule or regulation
          promulgated under the Act, the Exchange Act or any state securities
          laws. The Company will reimburse the Holders and each such controlling
          person, promptly, as such expenses are incurred, for any legal or
          other expenses reasonably incurred by them in connection with
          investigating or defending any such losses, claims, damages,
          liabilities, actions or proceedings.

     (4)  To the extent permitted by law, each Holder, severally and not
          jointly, will indemnify and hold harmless, to the same extent and in
          the same manner set forth in Section 7(c), the Company, each of its
          directors and officers who have signed the Resale Registration
          Statement, and each person, if any, who controls the Company within
          the meaning of the Act or the Exchange Act, against any losses,
          claims, damages or liabilities to which any of them may become
          subject, under the Act, the Exchange Act or otherwise, insofar as such
          losses, claims, damages or liabilities, actions or proceedings,
          whether commenced or threatened in respect thereof, arise out of or
          are based upon any violation or alleged violation by the Company of
          the Act, the Exchange Act, any state securities laws or any rule or
          regulation promulgated under the Act, the Exchange Act or any state
          securities laws, in each case to the extent (and only to the extent)
          that such violation occurs in reliance upon and in conformity with
          written information furnished by such Holder expressly for use in
          connection with the Resale Registration Statement or as a result of a
          sale made after receipt of a certificate contemplated by Section 6(d).
          Such Holder will reimburse such persons for any legal or other
          expenses reasonably incurred by any of them in connection with
          investigating or defending any such losses claims, damages,
          liabilities, actions or proceedings.

     (5)  With respect to the indemnification set forth in Sections 7(c) or (d)
          above, to the extent any indemnification by in indemnifying party is
          prohibited or limited by law, the indemnifying party agrees to make
          the maximum contribution with respect to any amounts for which it
          would otherwise be liable under said Sections 7(c) or (d) to the
          extent permitted by law, provided that (i) no contribution shall be
          made under circumstances where the maker would not have been liable
          for indemnification under the fault standards set forth in said
          Sections 7(c) or (d) and (ii) no party guilty of fraudulent

<PAGE>

          misrepresentation (within the meaning of Section 11 of the Act) shall
          be entitled to contribution from any party who was not guilty of such
          fraudulent misrepresentation.

8.   Reduction of Shares. The undersigned agrees that the Placement Agent or the
     Company may, in its sole and absolute discretion, reduce the undersigned's
     subscription to any number of Shares that in the aggregate does not exceed
     the number of Shares hereby applied for without any prior notice to or
     further consent by the undersigned. The undersigned hereby irrevocably
     constitutes and appoints the Placement Agent and each officer of the
     Placement Agent, each of the foregoing acting singly, in each case with
     full power of substitution, the true and lawful agent and attorney-in-fact
     of the undersigned, with full power and authority in the undersigned's
     name, place and stead, to amend this Subscription Agreement, including in
     each case the undersigned's signature page thereto, to effect any of the
     foregoing provisions of this Section.

9.   Further Documents. The undersigned agrees that it will execute such other
     documents as may be necessary or desirable in connection with the
     transactions contemplated hereby.

10.  Modification. Neither this Subscription Agreement nor any provisions hereof
     shall be waived, modified, discharged or terminated except by an instrument
     in writing signed by the party against whom any such waiver, modification,
     discharge or termination is sought.

11.  Notices. Any notice or other communication required or permitted to be
     given hereunder shall be in writing and shall be mailed by certified mail,
     return receipt requested, or by Federal Express, Express Mail or similar
     overnight delivery or courier service and delivered against receipt to the
     party to whom it is to be given: (i) if to the Company, at the address set
     forth on the first page hereof; (ii) if to the undersigned, at its address
     set forth on the signature page hereto; or (iii) in either case, to such
     other address as the party shall have furnished in writing in accordance
     with the provisions of this Section 11. Notice to the estate of any party
     shall be sufficient if addressed to the party as provided in Section 11.
     Any notice or other communication given by certified mail shall be deemed
     given at the time of certification thereof, except for a notice changing a
     party's address, which shall be deemed given at the time of receipt
     thereof. Any notice given by other means permitted by this Section 11 shall
     be deemed given at the time of receipt thereof.

12.  Counterparts. This Subscription Agreement may be executed through the
     execution of separate signature pages or in any number of counterparts, and
     each such counterpart shall, for all purposes, constitute one agreement
     binding on all parties, notwithstanding that all parties are not
     signatories to the same counterpart.

13.  Entire Agreement. This Subscription Agreement contains the entire agreement
     of the parties with respect to the subject matter hereof and there are no
     representations, covenants or other agreements except as stated or referred
     to herein.

14.  Severability. Each provision of this Subscription Agreements is intended to
     be severable from every other provision, and the invalidity or illegality
     of any portion hereof shall not affect the validity or legality of the
     remainder hereof.
<PAGE>

15.  Assignability. This Subscription Agreement is not transferable or
     assignable by the undersigned.

16.  Applicable Law. This Subscription Agreement shall be governed by and
     construed in accordance with the laws of the State of New York, without
     regard to the principles of conflicts of law thereunder.

17.  Choice of Jurisdiction. Any action or proceeding arising directly,
     indirectly or otherwise, in connection with, out of or from this
     Subscription Agreement, any breach hereof or any transaction covered hereby
     shall be resolved within New York, New York. Accordingly, the parties
     consent and submit to the jurisdiction of the United States federal, and
     state courts located within New York, New York.

18.  Taxpayer Identification Number. The undersigned verifies under penalties of
     perjury that any Taxpayer Identification Number or Social Security Number
     shown on the signature page hereto is true, correct and complete.

19.  Pronouns. Any personal pronoun shall be considered to mean the
     corresponding masculine, feminine or neuter personal pronoun, as the
     context requires.

<PAGE>

     IN WITNESS WHEREOF, the undersigned has executed this Subscription
Agreement this ___ day of _______________, 2000.

Number of Shares Subscribed for: _____________ Shares

INDIVIDUAL SUBSCRIBER:                      ENTITY SUBSCRIBER:

__________________________________          ___________________________________
(Signature of Subscriber)                   (Print Name of Subscriber)

__________________________________          By:    ____________________________
(Typed or Printed Name)                     Name:  ____________________________
                                            Title: ____________________________

__________________________________          ___________________________________
(Residence Address)                         (Address)

__________________________________          ___________________________________
(City, State and Zip Code)                  (City, State and Zip Code)

__________________________________          ___________________________________
(Telephone Number)                          (Telephone Number)

__________________________________          ___________________________________
(Telecopier Number)                         (Telecopier Number)

___________________________________         ___________________________________
(Tax I.D. or Social Security Number)        (Tax I.D. or Social Security Number)

ACCEPTED:

Coyote Network Systems, Inc.                For entities desiring that
                                            certificates for the Shares be
By:    ____________________________         delivered to an address other than
Name:  ____________________________         set forth above, set for the
Title: ____________________________         delivery address:
Dated: ____________________________         ___________________________________
                                                        (Address)

                                            ___________________________________
                                                 (City, State and Zip Code)

<PAGE>
                                     Annex A

-    The Offering shall consist of the sale of between $5,000,000 and
     $10,000,000, with a $3,000,000 over-allotment option at the Company's
     election, of the Company's Series B Preferred Stock (the "Shares") at a
     price of $4.75 per share. The Shares shall pay a dividend of 6% per annum,
     with dividends accruing 90 days from closing. The Shares shall be
     convertible into the Company's common stock at $4.75 per share at the
     option of the holder of the Shares. The Company shall have the right to
     redeem the Shares if the Company's common stock trades at or above $10 for
     twenty consecutive trading days, at which point the holders of Shares may
     exercise their conversion rights.

-    The placement fee to the Placement Agent shall be 7% of the gross sales
     price of the Shares (the "Placement Fee"). The Company may pay all or a
     portion of such placement fee in Shares ("Placement Fee Shares") at $4.75
     per share less the 7% Placement Fee. In addition, the Placement Agent will
     be entitled to reimbursement of certain expenses.

-    The Company shall, at its expense, (i) not later than a date 120 business
     days after the final closing of the Offering file a registration statement
     (the "Registration Statement") with the Securities and Exchange Commission
     (the "Commission") to register under the Securities Act of 1933 (the "Act")
     the resale of shares of common stock underlying the Shares by the holders
     of the Shares and the shares of common stock underlying the Placement Fee
     Shares, if applicable, (ii) use its reasonable best efforts to cause the
     Registration Statement to be declared effective under the Act as promptly
     as practicable, (iii) after the Registration Statement is declared
     effective under the Act, furnish holders with such number of copies of the
     prospectus included in the Registration Statement as the holders may
     reasonably request to facilitate the resale of the Shares; and (iv) use its
     reasonable best efforts to cause such Registration Statement to remain
     effective until such time as the holders become eligible to resell the
     Shares pursuant to Rule 144(k). In the event that the Company shall fail to
     cause the Registration Statement to be declared effective within 180 days
     of the final closing of the Offering (the "Effectiveness Deadline"), the
     Company shall issue to the holders as compensation therefor Shares equal to
     (i) 1% of the Shares for each 30 days or part thereof effectiveness is
     delayed until 60 days after the Effectiveness Deadline and (ii) 2% of the
     Shares for each 30 days or part thereof effectiveness is delayed beyond 60
     days after the Effectiveness Deadline.

<PAGE>

                          Coyote Network Systems, Inc.
                            ESCROW WIRE INSTRUCTIONS

Credit:
A/C #
Further Credit:
A/C #
Attn:

<PAGE>

                      SUPPLEMENT TO SUBSCRIPTION AGREEMENT

                          COYOTE NETWORK SYSTEMS, INC.

Reference is made to that certain Subscription Agreement, dated January 28,
2000, pursuant to which the undersigned has subscribed for shares of the
Company's preferred stock, which is convertible into shares of the Company's
Common Stock at a conversion price of $4.75 per share. All capitalized terms not
defined herein shall have the meanings set forth in the Subscription Agreement.

1.   The first sentence of the first paragraph of Annex A to the Subscription
     Agreement is hereby amended to read as follows:

     The Offering shall consist of the sale of between $5,000,000 and
     $15,000,000 of shares of the Company's Series B Preferred Stock at a price
     of $4.75 per share, for a maximum of 3,157,894 shares of Series B Preferred
     Stock.

2.   The press release attached hereto as Annex I is hereby incorporated by
     reference. Mr. McCullough's employment agreement provides for a salary of
     $160,000 per year and options to purchase 750,000 shares of Common Stock at
     $5.00 per share.

3.   The following modification is hereby made to Section 3(f) of the
     Subscription Agreement:

     The 1,250,000 shares of Common Stock that are reserved for issuance to a
     consultant pursuant to a consulting agreement, according to Section 3(f) of
     the Subscription Agreement have now been issued, bringing the number of
     shares issued to such consultant to 2,000,000. James McCullough owns
     approximately 33% of the consultant (the balance of which is owned by
     affiliates of First Venture Leasing, LLC) and approximately 25% of First
     Venture Leasing, LLC.

4.   Copies of Mr. McCullough's employment agreement, the financial services
     agreement with First Venture Leasing, LLC and the consulting agreement are
     available upon request.

<PAGE>

By signing below, the undersigned acknowledges that the information contained in
this Supplement amends, supersedes and updates the referenced provisions of the
Subscription Agreement. All other portions of the Subscription Agreement, unless
specifically amended by this Supplement, remain unchanged.

 Date: _____________________                 __________________________________
                                             Name:     ________________________
                                             Title:    ________________________

Accepted By:

COYOTE NETWORK SYSTEMS, INC.

____________________________
Name:  _____________________
Title: _____________________

<PAGE>

                                     ANNEX I

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