September 18, 1998
Dear Shareholder or Franklin Visitor:
Major accomplishments have been achieved in our Tempest Product and the FNet Telco Rollout.
Since we have not restated our corporate mission for some time now - here it is.
The Vision:
We envision Franklin building a global communications company offering System telco and wide area network standards based products made of proprietary software and hardware manufactured and sold by FTEL, which are extremely hard to copy and, Telco Services provided by FNet which are unique to FNet subscribers worldwide.
1. Franklin Telecom designs and builds hardware and software for
Internet Telephony and sells it to FNet and others.
2. FNet sells telco services and is building a worldwide IP telephone
network using products from FTC and others.
The motivation is the reward of capturing a bit of the trillion dollar telecom market which experts expect to consist of 12% Packet switched calls within the next 18 months. In the year 2000 that bit, for us, could be $1,000,000,000 (One Billion) in revenue.
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I understand that with this tumultuous time in the marketplace, information is very important. Given the competitive nature of our business, and the need to follow all SEC Fairness rules, it has been difficult to disseminate anything meaningful to our shareholders. However, I believe it is now time that we share FTEL's and FNet's strategy with you and why we believe we are prepared to take a significant position within the new and emerging international telecom sector.
Franklin Telecom:
The product strategy for FTEL, and in particular the Tempest System which is at the heart of FTEL, is to make a "Complete Telco in a Rack" which can be marketed to the literally hundreds of regional start-up telephone companies. The Tempest System will provide them with a cost-effective one-stop shopping service that can instantly allow them to leapfrog past their local competition by adding IP capabilities to their companies. Their alternative is a standard telco circuit switch costing 10 to 20 times more.
This is an example of the potential symbiotic relationship between Franklin Telecom and FNet. Franklin Telecom benefits from the hardware sales; FNet benefits by adding these geographic pockets to the FNet network, and in some instances possibly absorbing the companies themselves. It is a Win-Win situation.
The Tempest System now includes three products:
The Data Voice Gateway
The AMAS
The Billing System
We are already shipping all three units as part of the Tempest "Telco in a Box". The AMAS (Authentication, Mapping and Accounting Server) software is the most advanced system in the Internet Telephony Industry.
The fourth and last 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.
The Tempest 2.20, now available for shipment, includes fax capability. Our engineers continue to work toward additional features which will give the Tempest extra flexibility to fit into various work environments. Current focus is on completion of E1, for widespread European distribution.
By the way, our Tempest also includes a feature, the "Updater", which allows it to retrieve, install and test updates effortlessly. We believe this operation is completely unique.
Sales of DVG's have started to head for the levels we anticipated. During July we saw some high volume domestic shipments and quotations. I think you will pleased with our shipments for August and September.
Tempestr DVG
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Learn more about FTEL and our 18 year history, click here.
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FNet:
As you know, FNet has been busy deploying its new international Voice over Internet Protocol (IP or VoIP) network that will provide Internet and Intranet-based telephony services to businesses and individuals throughout the world. Currently, we have operational nodes in the United Kingdom, Guatemala, and Bosnia, with El Salvador, Honduras, New Zealand, Australia, and Curacao coming on line within the next 60-120 days. In addition, we have several contracts in final negotiations (Russia, S. Africa, Turkey, Lebanon, Syria, Italy, Philipines, China, Brazil), and hope to close these by the end of the year when our funding has been concluded.
We have all been following the recent developments in the news regarding telecom around the world. The reason these events are significant is that the global opportunity in IP telephony is the result of privatization and deregulation of telecommunications markets. In 1996, monopoly and former monopoly carriers (such as AT&T) accounted for more than 90% of the estimated $670 billion in worldwide telecommunications services revenues. The market is ripe for emerging multinational carriers such as FNet to exploit the pent-up demand and high price umbrellas created by the dominant carriers. As you can see, even a small amount of market share will develop into a multi-million dollar business for FNet within the next few years.
The building process:
I'd like to say a little bit about the concept of a Next Generation Telephone Company, to make sure you all understand where we are going with both FTEL and FNet.
FNet is in the process of deploying an international Voice over the Internet network that will provide Internet and intranet-based telephony services to businesses and individuals throughout the world. We are taking full advantage of several competitively-priced packet-base network protocols, such as F/R, IP, and in certain cases, ATM.
Our service is unique in that we combine traditional telco procedures and products with the latest innovative technologies. The first essential, in establishing a global telephone company, is to make sure that you can connect a call from anywhere to anywhere. The Harris Switch gives us this capability. The next phase is to implement the Internet capability, since that's where the cost saving really comes into play. As you know, one of our strategies here is to find Joint Venture partners who have solid marketing bases within their own countries. These JV partners then carry the responsibility for licensing and marketing concerns while we provide hardware and linkage. The capital we are raising for FNet will go toward expediting this process. The more we deploy, the more the revenue streams can increase.
Looking forward only a few months, IP telephony will continue to grow exponentially due to significant cost savings that arise when compared to conventional circuit switched networks that are currently utilized by the major carriers (AT&T, MCI, Sprint, BT, etc.,). Based on the same transmission standard as the Internet, IP telephony converts voice calls from analog to digital form, and then compresses the call into a packet that is routed to its final destination through a data network. Unlike traditional circuit switched networks that transmit voice calls through a single transmission line dedicated exclusively to that call, packet switching maximizes the use of bandwidth by routing multiple calls on the same line. As a result, IP networks improve the utilization of fixed bandwidth by a factor of nearly eight to one and are 50% to 75 % more cost effective than traditional circuit switched networks. In short, the reduced cost of the FNet network will enable us to become cash flow breakeven much faster than most of our competition.
Unlike other carriers that provide USA-to-country and country-to-USA service, we are focused on higher margin country-to-country service skipping the U.S. By deploying our own IP network to facilitate long distanced transmission from one country to another, the we are able to bypass existing settlement fees or tariffs. These fees, which can be as high as $0.35 per minute, are charged when telephone calls are carried into a country over conventional circuit switched lines, but are not applicable to calls transmitted via an intranet or the Internet.
As promised, the Harris Telephone Circuit Switch which is required to interface with all the phone companies which don't, as yet, have packet technology, has been installed and was up and functioning shortly before our announced date of September 1.
The battery backup for the Harris Switch (which probably sounds easy to the novice) consisted of eight thousand pounds of huge batteries which take up 25 square feet of floor space and stand higher than I am tall (6'4"). The distribution of the power is in two 6 ft. high 19" racks.
During the testing we were doing on the switch, just for a little extra excitement, we had a major thunder and lighting storm, including a small Tornado (almost unheard of in southern California) which touched down about a mile from here, uprooting trees and 21 power poles which serve Franklin. The power was down for 5 hours, and we were still a couple of days from having our batteries connected. It was OK, though, because there was no live traffic on the system at the time. Good planning, yes? --- Bring on the next big storm. (Actually, we prefer the storms we generate here at Franklin--Hurricanes, Typhoons and Tempests.)
On the FNet Joint Venture side, the fruits of our efforts, will continue to become obvious over the course of the next few weeks. Here is a current update:
Bosnia:
Eleven of the 15 earth stations are operational and averaged over 2,000 minutes per day in August. The September run rate shows a 30% growth rate over August. Additional sites for Turkey and Canada are under negotiation.
The FNet Debit cards are being sold now in Bosnia.
Guatemala:
Fully operational as of Sept. 1 and booking about 7,000 minutes per day.
London, UK:
The equipment has been installed and test traffic on our private lines with billing is being tested with live Debit Cards.
El Salvador:
Our equipment has been shipped and received in El Salvador and we expect revenue next month.
Russia:
The contracts have been signed with our "in-country partner"; we expect final approval from the Russian Ministry of Telecom by November.
Curacao, Netherlands Antilles:
The joint venture contracts have been signed and the formal Corporate documents have been filled in the Netherlands Antilles. The circuits and equipment have been order and revenue is expected in December.
We believe that Franklin will gain a competitive advantage in targeted markets by providing customers with both a full array of enhanced products from Franklin Telecom, and services from FNet. These will include the following:
International Long Distance - including high-margin country-to-country service
Corporate Private IP Solutions
Deployment of "Tempest-in-a-Rack" product solutions to small regional telcos
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We are on uncharted ground. We are building a road into the future. There are potholes, there are mountains and rivers to cross: we are now crossing them.
-- Frank Peters
Chairman & CEO, Franklin Telecommunications Corp.
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 of 1934. Such forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance, or achievements of the Company to be materially different from any future results, performance or achievements, expressed or implied by such forward-looking statements.
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