Updated President's message dated May 4...
May 4, 1998
Dear Shareholder or Franklin Visitor,
Many things have happened since our last update. From the outside, if you knew nothing about us except for watching our share price, it probably looks as though we've been on a roller coaster ride. Actually, we've broken through significant barriers with both Franklin Telecom and FNet that will be of great benefit to all of us.
Let's start with what's going on with FNet. You have probably read the press release announcing that FNet is now operating as an independent subsidiary. This is a terrific advance; to be honest, I find it astonishing that some people have viewed this with alarm. Let me set the record straight: this in no way affects the ownership of FNet. Speculation that this move forward has a negative impact on FTEL shareholders is complete baloney! The truth is that we now have excellent leadership that brings FNet not only a fresh perspective but experience at operating a successful, profitable service oriented business. Their goal is to deploy the FNet network in a manner that will encourage early and substantial revenue streams that will, in turn, help expedite the expansion of the network. FNet's success will directly benefit FTEL shareholders, since Franklin Telecom's ownership status of FNet is unchanged. As an FTEL shareholder you now have two companies working for you.
Meanwhile, my original management team is able to devote full attention to Franklin Telecom. During the last couple of months, we have added to our engineering, sales and marketing units. Engineers have been working to add features to the DVG as well as to give it extra flexibility to fit into various work environments. The sales staff has continued their mandate to present our product to Fortune 500 caliber companies; they are continuing to receive evaluation orders from names that will please you.
By the way, the Tempest System now includes three facets: we are, as you know, already shipping DVG's. We will be shipping Beta units of our AMAS (Authentication, Mapping and Accounting Server) software within a few weeks. The third unit is a standards based MM2000 (Multi-Media 2000) product which is H.323 compliant for audio and "net meeting" communications; this unit is still in the engineering phase.
Let me say a word about the time it is taking to produce the major hardware revenues we are anticipating with the DVGs: Internet Telephony, i.e. Voice over IP is a completely new ball game which is going to revolutionize the way companies do business. The cost savings for multi-site corporations, particularly for companies with overseas branches, is simply too spectacular to ignore. However, we are witnessing the reluctance of these giant companies to be the first to make the capital commitment to implement an intranet system.
One reason for this may be that there is still a widely held perception, based on experiences with a couple of our high-profile competitors, that the quality is not consistently good enough. As the economic pressure builds to pursue Voice over IP solutions, we'll see a "name company" make the commitment, and this will probably unleash a veritable log-jam of other companies hurrying to get on board. Our Tempest has consistently done very well in every head-to-head comparison. We feel confident that this will carry over to the companies who are testing our units along with our competition. In other words, once big companies accept the concept, we are going to get our share of the orders!
You may not yet be aware of the advances Franklin is making in establishing our name within the telephony community. In March, our marketing team debuted a new booth in the Editor's Choice pavilion at the giant CT Expo '98 held in Los Angeles. This looks great and features plexi-glass mini-booths designed to mute floor noise while participants demo the Tempest. We also sent a team to the industry-heavy Pulver show recently held in San Jose, CA. We will be participating in the CTI show to be held in Baltimore during May. In fact, Franklin was one of only six companies invited to operate a special learning center on Voice over IP technology which will be featured at this exposition! In addition, Franklin's name is cropping up in numerous trade publications.
Despite the on-going progress at Franklin, we have seen a sharp decline in our share price since the first of February. This is one of those rare instances when we believe we know pretty specifically what this has happened. In 1995, after an extended period of research & development Franklin needed funding to bring our original channel bank to market. To raise this money we had a 504 Private Placement. The Private Placement consisted of units containing one share of FTEL stock and one warrant to purchase a share of FTEL stock in the future. The largest participant in this offering was the M. H. Meyerson Company and several of their individual affiliates. Last year, we had an S-1 filing which did two things: it put Franklin back on full reporting status and it registered the warrants which were issued in 1995 to encourage their conversion (which would bring about 2.5 million dollars into the company). This registration meant that the shares, once converted, could be sold without the usual restriction time.
Most of the outstanding warrants were converted soon after the eligibility date in November. The Meyerson group, however, waited until February to begin their conversion. Over a ten week period they converted several large blocks of warrants (usually 300,000-400,000 at a time) into shares that we believe they immediately sold. (This is typical: they don't generally hold stock long term.) Altogether they had just over one million four hundred thousand shares. Viewed in this light, we haven't done so bad at absorbing this deluge of shares. The good news is that they have completed their conversion and our stock should be able to go back to a much more orderly market.
In conjunction with this, I want to update you on the status of our application for NASDAQ. At the time we filed our application in January, we qualified on paper for inclusion into the National Market system. With the eroding share price, due to what we believe was an oversupply of shares provided by the Meyerson Group, amongst other reasons, NASDAQ was reluctant to accept our inclusion into the system.
Last week, while in New York on business Tom Russell (our CFO) and I visited NASDAQ in Washington, D.C. to find out where we stand. Our meeting (they were very gracious to us) resulted in NASDAQ asking for us to supply additional information. After NASDAQ receives this information, we hope to get a final answer within a few weeks.
In closing, I want to express appreciation to all of you who were able to come to Westlake Village for our Shareholder's Meeting. (Did you know we now have between 6,000 and 7,000 shareholders?) We have a core of knowledgeable and dedicated shareholders who have backed us and believed in us over the long haul. Thank you for your support. Our shared dream is close to fulfillment.
Bulletin: As this is being posted, we've just received notification that our TempestAr DVG has once again been named "Best in Show" at the recent Computer Telephony Expo '98 in Los Angeles!
Thanks for stopping by our Web Site.
-- Frank W. Peters
Certain statements in this material constitute "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act
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