Coyote
Network Systems, Inc
April 8, 1999
Dear Shareholder:
The financial results for the third quarter of fiscal '99, ended December 31, 1998 were greatly improved over the prior year's results and represent progress as we execute on our strategy. These results, however, did not meet our expectations. Revenue for the third quarter increased 680% to $12,931,000, compared with revenue of $1,659,000 for the third quarter of fiscal '98, ended December 31, 1997. The Company had an operating loss of $3,868,000 or ($.38) per share in the third quarter of fiscal '99, which included a deferral of $3.7 million in profit or $.36 per share from one customer relating to an equipment sale as described below, compared with an operating loss of $3,308,000 or ($.42) per share for the third quarter of fiscal '98. The Company's revenue for the nine months of fiscal '99 increased 1200% to 35,288,000, compared with revenue of $2,709,000 for the same period in fiscal '98. The Company had an operating loss of $4,503,000 or ($.47) per share for the nine months of fiscal '99 which included the #3.7 million deferral in profit from one sale, compared with an operating loss of $10,123,000 or ($1.51) per share for the same period in fiscal '98.
We deferred recognition of $3.7 million in profit attributable to a $7.2 million equipment sale to Wireless USA, an emerging international long distance provider. We granted extended payment terms to Wireless USA until it obtained lease financing. In march, Wireless USA entered into a financing arrangement with PrinVest Corporation under which PrinVest has agreed to provide $8.6 million in equipment financing. As previously stated, we will recognize the profit on this order as payment is received or as contingencies are removed.
Our result from the disruption we experienced in December was delays in obtaining some customer orders, most of which required lease financing. In February, PrinVest agreed to provide more than $20 million in lease financing to our customers on a case-by-case basis. In March, PrinVest agreed to provide $7.4 million in equipment and service financing to two of our customers.
Systeam and Apollo Telecom Announcements
We announced an agreement to acquire a controlling interest in Systeam S.p.A., a Rome based developer of voice, data, video, and Internet solutions. We recently announced that Systeam S.p.A. had agreed to extend the date by which Coyote could increase its equity position in Systeam. While we have already increased our equity position in Systeam, our plan to acquire approximately 60% is dependent on the plan to finance the acquisition with the proceeds of a loan commitment previously made to Coyote by outside sources. These proceeds, however, have not yet been received and obviously, we have no assurance as to if or when they will be received. We will continue to explore equity and debt options to fund ongoing operations and acquisitions under terms we believe are favorable to the Company and its shareholders.
We also announced an agreement to acquire substantially all of Apollo Telecom in a stock transaction. Apollo Telecom is a licensed carrier in Japan that we believe could add operating synergies to Coyote's international long distance carriers, INET Interactive Network System and American Gateway Telecommunications. INET provides international long distance services primarily to Japanese and French speaking people in the U.S. AGT provides wholesale international long distance services. We believe Apollo Telecom's network infrastructure will help leverage long distance traffic to the Pacific Rim for Coyote companies and their customers. Coyote's ability to also provide network integration services should enable us to deliver high quality service at competitive prices. The completion of Apollo Telecom is subject to a number of operating and financial closing conditions.
Coyote's Strategy
As previously announced, a fundamental component of our strategy is to provide a total solution to switchless resellers and emerging carriers. We intend to provide technologies, international long distance, network integration and international network partnerships to enable switchless resellers to convert non-facilities-based traffic into voice over Internet Protocol (IP) using distributed, software-driven systems. We expect to benefit by providing the acquired switchless reseller with access to TelecomAlliance's network providing switches, facilitating equipment financing, providing facilities-based "back room" operations, improving their margins, increasing their quality of service and providing them with a path to voice over data networks.
In addition, we plan to accelerate growth through TelecomAlliance, our joint venture with Profitec. TelecomAlliance plans to offer cost effective network services and expects to add features, functions and assets that will enhance the value of switchless resellers. TelecomAlliance plans to offer resellers the opportunity to route traffic over TelecomAlliance's IP-based network at reduced costs. TelecomAlliance also plans to carry up to 550 million minutes of traffic per month for its customers.
Sincerely,
James J. Fiedler Daniel W. Latham
Chairman and Chief Executive Officer President and Chief Operating Officer |
