Item 1. Business
OVERVIEW
aeroTelesis, Inc. (the "Company") is an international telecommunications company
which intends to provide next generation telecommunications technologies and
services. The Company's targeted application markets for its services include
satellite communications, mobile communications, Voice over Internet Protocol
(VoIP), and other broadband applications. At this time, the Company is targeting
the launch of its technology and services in the global satellite and VoIP
network services markets.
The Company's core technology platform is a licensed modulation method known as
Ultra Spectral Modulation (USM). USM is a technology that significantly
increases spectral efficiency in wireless applications and provides for
high-speed and high-capacity networks at substantially lower cost relative to
existing wireless technologies. USM is designed to avoid bottlenecks by
providing data transmission channels with higher quality and throughput rates
than those of conventional modulation techniques.
The Company intends to launch its first commercial service, VoIP network
services, in the second half of 2004. It plans to deploy USM technology for use
in satellite communications in 2005. aeroTelesis eventually plans to deploy
wireless networks for mobile voice and data services utilizing USM in the manner
that GSM (Global System for Mobile Communications) and CDMA (Code Division
Multiple Access) have been utilized to deploy the majority of wireless networks
existing today.
ORGANIZATIONAL HISTORY
Formerly known as Pacific Realm, Inc., the Company was incorporated in Delaware
on August 26, 1968 as Continental Convalescent Centers, Inc. and was involved in
the health care industry. The Company subsequently changed its name to Century
Convalescent Centers, Inc., National Health Services, Inc., Carex International,
Inc. and Medica USA, Inc. On July 6, 1984, the Company changed its name to
"Pacific Realm, Inc." when it entered into the gold mining business. Those
operations were ultimately unsuccessful and terminated. The Company was inactive
and dormant from 1989 through 2000. During this period, the Company did not have
revenues, operating profits or any identifiable assets attributable to any
industry segment. In 2000, the Company began limited operations and began
seeking opportunities to consult to companies interested in establishing telecom
businesses in the Asia-Pacific region as well as in Latin America and other
less-developed areas of the world.
In October 2003, the Company acquired all issued and outstanding shares of
Aerotelesis Philippines, Inc. ("ATP"), a British Virgin Islands company, in
exchange for the issuance of 75,000,000 shares of the Company's common stock to
the sole shareholder of ATP, Nations Mobile Networks Ltd. ("Nations"), formerly
known as Aerotelesis Ltd. ("ATL"). As a result of this transaction, ATP is a
wholly-owned subsidiary of the Company and Nations now holds approximately 81%
of the fully diluted outstanding shares of common stock of the Company.
The Company's headquarters are located in Los Angeles, California. The Company's
primary mailing address is 1554 S. Sepulveda Blvd., Suite 118, Los Angeles,
California, 90025. We can be reached by telephone at (310) 235-1727, and our
website address is www.aerotelesis.com.
NEXT GENERATION TELECOMMUNICATIONS SERVICES
There are several next generation telecommunications applications that
aeroTelesis is developing into a comprehensive portfolio of services that can be
offered to several markets, all of which the Company believes to have
substantial growth prospects.
Voice over Internet Protocol (VoIP) Network Services
The Company is targeting the launch of its first commercial services in the
second half of 2004, beginning with VoIP network services delivering voice
traffic for customers in the United States, Asia and other international
markets. VoIP is an alternative to services provided by traditional telephone
carriers. VoIP technology converts voice into data packets, sends the packets
over data networks and reconverts them into voice at the receiving end. A VoIP
network can be shared simultaneously by multiple users for voice, data and video
unlike traditional telephone networks which use dedicated circuits for each
telephone call. As such, VoIP networks are more efficient than a dedicated
circuit network which is restricted by the traditional telephone network's
one-call, one-line limitation. This improved efficiency creates cost savings
that can be passed on to the consumer in the form of lower rates or retained by
the VoIP service provider.
The VoIP industry has grown from the early days of calls made through personal
computers. According to market research firm Insight Research, VoIP-based
services will grow from $13.0 billion in 2002 to nearly $197.0 billion in 2007,
representing a significant opportunity for VoIP providers. According to the
World Trade Organization, at least half of its member governments around the
world have committed to telecommunications deregulation, opening new markets and
fostering competition with incumbent telecommunications providers.
The primary drivers of growth in VoIP are:
o the demand by consumers for lower cost phone service;
o the improvements in quality and reliability of VoIP calls fueled by
advances in technology, development of the network, and increased
supply of inexpensive bandwidth capacity;
o the continued deregulation of the telecommunications industries
domestically and internationally, resulting in new market
opportunities for VoIP services;
o the product innovations and increased amount of features, such as
video conferencing and multimedia applications, among others,
allowing VoIP providers to offer services not currently offered by
traditional telephone service companies; and,
o the increasing demand for national and international long distance
communication services driven by the increased mobility and
globalization of the workforce.
As a result of these developments, consumers, enterprises and telecommunication
service providers are utilizing and offering services based on VoIP. Consumers
are using VoIP-enabled services, such as calling cards and IP telephones, to
realize cost savings on national and international long distance calls.
Enterprises are reducing telephony expenses by using VoIP to link their
workforce within offices and around the world via privately secured, cost
effective IP networks. VoIP enables telecommunication service providers to
reduce their network costs and to deliver new value-added products and services
that cannot be supported by traditional telephone networks.
Accordingly, the Company's first initiative will be to establish VoIP network
services for customers in the United States and Southeast Asia. aeroTelesis is
licensed by the U.S. Federal Communications Commission (FCC) under Section 214
of the 1996 U.S. Communications Act to provide international telephone service
as a facilities-based international common carrier. The Company maintains
network facilities in Los Angeles and plans to expand with additional Points of
Presence ("POPs") in major cities in the U.S. and Canada. Additionally,
aeroTelesis is in the process of filing for a Competitive Local Exchange Carrier
(CLEC) license. The CLEC license would allow the Company to provide basic local
exchange telecommunications services through its own facilities and/or leased
facilities. In the future, the Company plans to launch VoIP services in the
Philippines and Indonesia in conjunction with local partners in such countries.
Through existing network facilities, aeroTelesis currently has the capability to
provide IP solutions to customers interested in subscribing to VoIP services. In
future stages, aeroTelesis plans to expand its network to offer prepaid calling
cards and other wholesale services that will provide international voice traffic
termination capabilities. aeroTelesis intends to offer IP solutions for
enterprise and other customers interested in maintaining their own network
in-house.
We cannot assure you, however, that we will be successful in establishing
additional POPs or in receiving approval for the CLEC license. We cannot assure
you that we will be successful in eventually expanding our services to include
prepaid calling cards and other wholesale services. We also cannot assure you
that we will be successful in our plans to launch VoIP services in the
Philippines and Indonesia with local partners or that we will be successful in
generating significant future revenue for the Company from any of these
partnerships.
USM Based Products and Services
Satellite Communications. In 2005, the Company, through its wholly-owned
subsidiary aeroSat, Inc. ("aeroSat"), a Delaware corporation, intends to deploy
USM technology for use in satellite communications services, focusing on fixed
satellite and direct broadcast satellite (DBS) or direct-to-home (DTH) services
in Southeast Asia and other key markets. In these target markets, the Company
plans to deploy USM technology in the satellite systems of strategic partners
with existing operations. Such systems, in general, comprise of an
earth-orbiting satellite which has several transponders. Satellite transponders
function as a receiver, amplifier and transmitter of microwave signals from and
back to earth. A conventional transponder can typically provide several analog
channels, 6 to 8 standard-definition digital TV channels, and 2 high-definition
(HDTV) channels. Our preliminary test results indicate that USM technology can
potentially be developed and integrated into existing satellite network
infrastructure to provide numerous additional channels per transponder enabling
current service providers to reduce total per transponder costs by a substantial
factor and, therefore, would enable satellite operators to offer a greater
variety of programming and services to customers at more competitive prices.
Additionally, USM technology could make HDTV viable on a larger and more
economical scale. HDTV is currently limited by the lack of bandwidth on
conventional transponders.
According to consulting firm Futron Corp., the global satellite services market
in 2003 was valued at $55.9 billion and has more than tripled in size from a
total market value of $15.8 billion in 1996. Although the market for commercial
satellite communications products and services experienced a slowdown during the
last two years due to the global economic environment, we believe there are
noteworthy opportunities emerging in the near future to provide high-speed
satellite links, especially with the use of USM. We believe that the demand for
satellite communication products may increase as a result of the following
factors:
o World-wide demand for communications services in general, and
broadband data networks in particular;
o Improving cost-effectiveness of satellite communications for many
uses;
o Recent technological advancements which broaden applications for and
increase the capacity and efficiency of satellite based networks;
and,
o Global deregulation and privatization of government-owned
telecommunications carriers.
Accordingly, aeroSat is currently beginning the commercialization process of a
product which integrates USM into the existing satellite network infrastructure.
aeroSat intends to either sublicense to or partner with satellite service
providers for the use of USM technology in existing satellite systems and
generate revenues via either a royalty or profit-sharing agreement with existing
satellite operators.
We cannot assure you, however, that we will be successful in sublicensing or
partnering with satellite service provider for the use of USM technology in
existing satellite systems, nor can we assure you that we will be able to
generate significant revenue from royalties and/or profit-sharing arrangements
with such providers.
Commercial communications satellites are used for a variety of global
communications applications, either as a substitute for or as a complement to
the capabilities of terrestrial networks, including land and submarine fiber
optic networks. With lower underlying costs using USM technology, satellite
service providers will be able to provide fiber-optic-like capacity at very
competitive rates. As such, the Company is focused on those segments of the
satellite services industry which compete most directly with terrestrial
networks. These segments include:
Fixed Satellite Services
Service providers in the fixed satellite services sector provide communications
links between fixed points on the earth's surface. These services include the
provision of satellite capacity between two fixed points, referred to as
point-to-point services, and the simultaneous provision of satellite capacity
from one fixed point to multiple fixed points, referred to as
point-to-multipoint services. Point-to-point applications include telephony,
video contribution and data transmission, such as Internet backbone
connectivity. Point-to-multipoint applications include broadcast television and
corporate networks. In conjunction with in-country strategic partners in our
target markets, we expect to deploy USM technology for use in fixed satellite
services in order to provide significantly increased capacity to telephone and
Internet service providers, broadcast TV networks and corporate networks.
Broadband Services
Broadband satellite services can provide the much needed "last-mile", high-speed
Internet access to customers in areas unserved or underserved by terrestrial
alternatives, such as digital subscriber line (DSL) and cable. Next generation
broadband satellite service providers are expected to create demand in the
market through, among other things, the introduction of less expensive consumer
hardware and new broadcast services (with the use of new spectrum, including the
Ka-band frequencies) which aim to make transmissions cheaper and faster.
Satellite operators today still face many technical and economic hurdles in
effectively competing with DSL and cable, but nevertheless continue to push
forward with broadband initiatives, an indication of their intent to increase
their portfolio beyond broadcast TV services and into broadband Internet and
voice services.
In conjunction with strategic partners in our target markets, we believe USM
technology may provide consumers and enterprises broadband access through
satellites at an affordable price and thereby stimulate demand for broadband
satellite services.
Direct Broadcast Services (DBS)/Direct-To-Home (DTH) Services
Direct broadcast services (DBS), or direct-to-home (DTH) services, broadcast a
television signal directly to consumers' homes and permit a high-quality
broadcast of a large number of channels. Due to the point-to-multipoint
capabilities of satellite, DBS has a competitive advantage in areas that do not
have access to digital cable or high-quality terrestrial infrastructure. We plan
to deploy USM technology, in conjunction with strategic partners in our target
markets, in order to significantly increase satellite capacity to providers of
DBS services as well as distributors of DTH programming.
Other Segments
While the Company is focused on those segments of the satellite services
industry which compete most directly with terrestrial networks, the Company
recognizes the application of USM technology in other segments which include:
Digital Audio Radio Services (DARS)
Satellite radio, or digital audio radio service (DARS), offers programmers a
wide-reaching distribution platform for digital quality sound and numerous
channels of programming. USM technology can be used to provide significantly
increased capacity to providers of DARS.
Mobile Satellite Services
Mobile satellite services provide voice, data, global positioning system (GPS)
and radio broadcasting services to mobile terminals. Recent efforts to develop
mass market mobile satellite telephony systems using customized satellites have
been largely unsuccessful due to problems with technology and slow customer
uptake. USM technology could resolve such problems and re-stimulate customer
uptake.
Mobile Voice and Data Networks. Through the deployment of USM technology,
aeroTelesis aims to become a low-cost provider of high-quality wireless
services. The Company is primarily focused on deploying USM technology in new
mobile wireless voice and data networks in developing markets where there is
significant opportunity for rapid growth due to low mobile penetration and
substantial demand for basic voice telephony services. In such markets, which
include Southeast Asia, Latin America, and select regions in the Middle East and
Africa, USM aims to provide a technology "leap-frog" to an advanced generation
of wireless services. More importantly, USM would provide for advantages, such
as:
o Increasing voice and data capacity significantly with less network
infrastructure
o Being able to deploy high-speed data and voice services using lower
level frequencies which provide for greater signal propagation and
more efficient network design
o Reducing capital expenditure for the implementation of a
"greenfield" (brand new) network
These and other technical advantages created by the spectral efficiency of USM
would enable the Company (and other mobile operators utilizing USM) to operate
with a lower cost base, leading to more attractive pricing to potential
customers. The cost-reducing benefits provided by USM would be attractive to the
price-sensitive, "second-tier" consumers who represent a major market segment of
developing countries. The value proposition of a USM mobile network is its
ability to provide the mobile subscriber high network quality and premium
services which are more competitively priced than what is currently offered by
existing wireless technologies.
While the mobile telephone industry is well-established in the developed world,
the mobile telephone industry in the developing world is still in its infancy.
aeroTelesis believes that mobile telephony will grow rapidly in developing
countries because of the poor quality of existing wire-line service, the
unsatisfied demand for basic telephone service and the increasing demand from
users who want the convenience of mobile telephones. In some countries, the
mobile telephone network provides significantly improved access to the local and
international wire-line network compared with the existing wire-line service. In
addition, developing countries are expected to benefit both from better
technology and lower equipment costs than those at comparable stages of market
development in developed countries. Penetration rates (the number of subscribers
per 100 people) are substantially lower in developing countries than in
developed countries. Consequently, aeroTelesis believes that its target markets
offer higher growth potential.
The Company is targeting the deployment of USM technology in new wireless voice
and data networks in the 2005-2006 timeframe, beginning in the Philippines and
followed by other countries in Southeast Asia, where there is an estimated
existing population of over 600 million people. Because of the network
efficiency that may be achieved by USM technology, infrastructure and
maintenance costs are expected to be lower relative to traditional network
infrastructure costs. This would allow the Company to price its services at a
lower cost relative to existing competitors. The Company believes its low-cost
value proposition will position the Company well to benefit from the increasing
demand for mobile voice services in developing markets and to penetrate into the
"second tier" customer bases in many of these markets.
The Company is also targeting utilization of USM in mobile services as an
alternative to the existing GSM/GPRS and CDMA/CDMA EV-DO and EV-DV pathways to
wideband CDMA. We expect to initially market USM as a new standard to emerging
economies and, over time, as the technology matures and establishes greater
market presence in these regions, we intend to eventually market USM to existing
operators in first world markets as well.
The development of USM mobile products is occurring in parallel with our
satellite products but is expected to take considerably more resources and time,
given the complexity of additional factors present in mobile network
environments.
We cannot assure you, however, that we will successfully deploy USM technology
in new and existing wireless voice and data networks in the aforementioned
countries and timeframe, nor can we assure you that USM will become a standard
in either the emerging or developed economies. We also cannot assure you of the
successful and timely development of USM mobile products, nor can we assure you
that we will be able to generate significant revenue from the application of USM
technology to the mobile communications business in general.
USM TECHNOLOGY
The core of the Company's wireless technology platform is a modulation
technology known as Ultra Spectral Modulation (USM). USM is an acronym that has
been adopted as the name for a family of ultra narrowband modulation
technologies based upon minimum sideband modulation methods. USM is designed to
substantially increase bandwidth efficiency, whereby high-speed data
transmission rates can be achieved through narrow channels of bandwidth with low
power consumption. USM is distinct and unrelated to existing modulations
standards, including those of GSM and CDMA, and is believed to be more than just
an incremental improvement for the provision of wireless services.
In its most recent demonstration of USM, the Company conducted a circuit board
test exhibiting data transmission rates of 6 megabits per second (Mbps) in a
channel 3.0 kilohertz (KHz) wide in a multi-channel environment with the
presence of noise and interference.
The data transmission rate of USM surpasses traditional modulation techniques
which deliver a maximum data throughput rate of a few kilobits per second (Kbps)
in a 3 KHz channel. Comparatively, other wireless standards, such as GSM (TDMA)
and CDMA, generally require larger frequency bandwidths of 200 KHz and 1.25
megahertz (1250 KHz), respectively, to deliver a few voice channels. W-CDMA
(Wideband CDMA), a 3G technology that increases data transmission rates in GSM
systems by using the CDMA air interface instead of TDMA, requires even greater
bandwidth to deliver viable broadband-enabled services. We are currently leading
an academic study to substantiate USM's novel approach to modulation technology.
The potential efficiency of USM is apparent in satellite communication
applications. A typical direct broadcast satellite (DBS) operator will utilize
geosynchronous satellites with transponders transmitting in the Ku-band
frequencies with approximately 24 MHz to 27 MHz of bandwidth. With current
technology, a Ku-band transponder with 24 MHz of bandwidth can support up to 8
standard-definition, digital TV channels, each transmitting up to 3 Mbps
downstream. Uplink speeds are significantly lower. USM technology could provide
at least 80 channels per Ku-band transponder, transmitting at least 6 Mbps
downstream in channels that are up to 30 KHz wide. This represents a gain of at
least ten times (10x) the typical number of channels and a doubling of
transmission speeds provided on a Ku-band transponder today.
Furthermore, USM may reduce the cost of wireless infrastructure deployment
because it can be used to transmit data that is "sandwiched" between existing
frequency channels without causing interference (e.g., between digital cable
channels), therefore increasing the available bandwidth that can be used by an
operator. The spectral efficiency inherent in USM technology can enable
aeroTelesis to deploy an advanced, next generation wireless network with
markedly higher capacity at lower costs.
We cannot assure you, however, that we will be successful in commercializing USM
technology in satellite and mobile communications applications, nor can we
assure you that USM will gain the market acceptance required to generate
significant revenue for the Company.
USM TECHNOLOGY LICENSES
Through the Company's acquisition of ATP in October 2003, aeroTelesis acquired
the rights to deploy USM technology in the Philippines for wireless
telecommunications services (such as wireless local loop and mobile voice and
data networks). As a former wholly-owned subsidiary of Nations, the initial
exclusive licensee of USM, ATP had been assigned the rights to deploy USM
technology in the Philippines.
Furthermore, it was negotiated in the acquisition of ATP that aeroTelesis would
be given the right of first refusal to make additional acquisitions of
telecommunication licenses and/or operations from Nations for the following
regions: Southeast Asia, South and Central America, and the Middle East. Any
future acquisition would also include the right to utilize and deploy USM
technology in any country that is directly related to the acquisition.
Subsequently in February 2004, aeroTelesis established a direct licensing
relationship and agreement (the "License Agreement") with the developer and
manufacturer of USM technology, Photron Technologies Ltd. ("Photron"). Pursuant
to the terms and conditions of the License Agreement, aeroTelesis was granted a
license to utilize and deploy USM technology for use in wireless
telecommunication services (applicable to all international markets without
restrictions), such as wireless local loop as well as mobile voice and data
networks. It was agreed that the license to USM technology for wireless
telephony would be exclusive to aeroTelesis and Nations. However, the License
Agreement also granted aeroTelesis, solely, the exclusive rights to utilize and
deploy USM technology for use in satellite communication networks.
In view of the semi-exclusive licensing relationship (for the use of USM in
wireless telephony services) that aeroTelesis participates in with Nations, the
Company and Nations entered into a Non Conflict and Cooperation Agreement (the
"NC&C Agreement") in March 2004. Through the NC&C Agreement, the following
principles were established:
o Nations reaffirmed its granting of a right of first refusal for
aeroTelesis to acquire from Nations any wireless network, operation
and/or license that Nations is able to secure or establish in
Southeast Asia, South and Central America, and the Middle East;
o However, if aeroTelesis declines to acquire the operation or
license, then Nations may allow aeroTelesis the opportunity to
participate as a minority partner at a percentage to be negotiated
at that time;
o aeroTelesis has the same rights to USM technology for the
aforementioned territories and can seek to establish strategic
partnerships in these territories without being in conflict with
Nations;
o If Nations is able to identify and/or secure wireless
telecommunication opportunities in other international territories
and can establish a wireless network license to implement services,
it may invite aeroTelesis to participate as either the lead or
co-developer of the wireless operation; and
o As aeroTelesis has the exclusive license from Photron for the
deployment of USM technology for use in satellite networks, Nations
can introduce satellite-related opportunities to aeroTelesis; and if
a license or satellite operation can be secured by aeroTelesis, then
Nations will be compensated with a participation fee to be
negotiated at that time. Furthermore, if aeroTelesis is unable to
deploy the satellite operation because of possible country risks
associated with the particular territory or other regulations that
might prohibit its direct involvement in the country, then
aeroTelesis is willing to consider a sub-licensing relationship with
Nations, for which the terms and conditions will be negotiated at
the appropriate time.
USM TECHNOLOGY COOPERATION & DEVELOPMENT
In conjunction with the License Agreement, aeroTelesis and Photron have also
established a Technology Cooperation and Development Agreement (the "TC&D
Agreement"). The primary scope of the TC&D Agreement comprises technology
cooperation and development for USM products and systems that aeroTelesis
intends to deploy in its target markets through its license from Photron. As
each party has its own areas of expertise, aeroTelesis and Photron will work in
cooperation and collaboration, as necessary and subject to the specifications
and requirements that aeroTelesis needs for its wireless networks, to maximize
their skills for the development of future generations of wireless products and
systems based on USM.
Other principles established in the TC&D Agreement are as follows:
o As necessary and appropriate, aeroTelesis will participate in
technical discussions and offer its suggestions and views on the
commercial development of USM technology for aeroTelesis' networks.
Photron will also encourage and/or request aeroTelesis'
participation as and when it deems to be appropriate.
o The areas for technical cooperation and development will include but
not be limited to the following: (a) product definition and design;
(b) systems integration; (c) identification of new applications and
upgrading existing applications; and, (d) identification of new
partnerships with other wireless technology companies.
o aeroTelesis will be available to provide technical
advisory/consulting services for Photron with respect to the
development of USM networks and assisting to make it into a new
wireless standard, in the same manner that GSM and CDMA are known as
predominant standards in the industry today. Such technical
advisory/consulting services include, but are not limited to, the
following activities: (a) technology validation; (b) technology
analysis and reviews; and, (c) academic research studies.
GLOBAL STRATEGY
The Company's foremost objective is to ultimately capture a significant share of
the global satellite and mobile wireless services market. The Company intends to
differentiate itself with products and services that are designed, developed and
commercialized to increase network efficiency and allow for a cost-effective
transition to next generation networks.
Our strategy principally consists of the following:
o initially focusing on target markets in developing countries where
our value proposition for lower cost next generation services would
be more significant than in those markets where a significant amount
of capital has already been committed to network expansion based on
incumbent technology;
o lowering the deployment and utilization costs of satellite and
mobile networks for our local partners and customers by leveraging
our advanced technology and capabilities; and,
o offering our partners and customers an increased number of features
and enhanced functionality.
We intend to implement our strategy by:
Capitalizing On Our Advanced Technology
We believe that the global satellite and mobile communications markets present a
number of attractive opportunities for which we can apply our advanced
technology and capabilities. In the future, we plan to develop new products and
enhance existing products by leveraging our technology and capture a significant
share of these anticipated growth opportunities.
Emphasizing Operational Efficiency and Financial Performance
We place a strong emphasis on operational efficiency and financial performance.
We believe that having this operational focus is essential to our future success
in achieving profitability while continuing to grow the business. As part of
this emphasis, we plan to devote significant time and resources to key
components of our business, including defining wireless applications and
platforms for USM technology, maintaining strong customer relationships,
establishing strong local market partnerships, maintaining foresight in research
and development efforts, and expanding our markets. We expect our strong
emphasis on operational efficiency and financial performance to be a key factor
in our success.
Leveraging Strong Partners in the Countries where we Operate
We intend to operate primarily through joint ventures with prominent local
business partners, with which we jointly exercise management control. While the
day-to-day management of our operations will be the responsibility of the local
management team, key personnel of operations will be appointed in co-operation
with our partners. We intend to actively manage our operations through:
o recruitment and selection of local management, which is subject to
the approval of aeroTelesis' Board of Directors;
o development of business plans in conjunction with local management;
o development of network design and expansion plans with local
technical management;
o leveraging local partner access to local capital markets; and,
o supervision and support by our internal auditors and administrative
personnel.
TARGET MARKETS AND CUSTOMERS
VoIP Network Services focused on traffic between the US and Developing Countries
Asia-Pacific
In the Asia-Pacific region, VoIP services are expected to be popular, given high
public switched telephone network (PSTN) tariffs, especially international
calls, which are traditionally used to subsidize local calls. The rapid growth
of VoIP services in the Asia-Pacific region can be attributed to the gradual
dismantling of monopolies in the telecommunications sector in most markets. Many
Asian countries do not have a well-developed infrastructure, particularly in
Southeast Asian countries including the Philippines and Indonesia. Hence, the
potential for VoIP development is expected to be greater in such countries.
In the Philippines, Indonesia and other regions in Southeast Asia, the Company
is planning to launch international IP network services in conjunction with
local partners to provide voice traffic services, domestically as well as
internationally between those countries and the U.S. in late 2004. We cannot
assure you, however, that any of these partnerships will result in significant
future sales for the Company.
Latin America
Gartner Dataquest estimates VoIP revenue for the Latin American region to grow
from $300 million in 2002 to $5.4 billion by 2007. In Latin America, the Company
has been in discussions with several major telecommunications service providers
regarding the potential integration of our IP network services into their
existing terrestrial and wireless networks. aeroTelesis is currently in
discussions with a potential customer in the Central American region and is
undergoing an initial test of our service and equipment before a more extensive
field trial is conducted. We cannot assure you, however, that any of these
discussions will result in future sales for the Company.
Global Market Deployment of USM with a focus on Developing Markets
While our products and services are expected to ultimately be deployed and
implemented throughout the world, we intend to initially focus on emerging
economies in Southeast Asia and Latin America. Our business strategy hinges on
initially focusing on target markets in developing countries where our
cost-reducing value proposition would be more significant instead of markets and
countries in which a significant amount of capital has been committed to network
expansion based on incumbent technology. There is a larger mass of subscribers
that has been left untapped in these markets and such customers would be
attracted to more cost-effective mobile services. We also intend to target
markets where terrestrial networks are less well-developed and where alternative
communications infrastructure, including satellite and fixed wireless or mobile
networks, are widely adopted.
We are currently focused on providing USM technology for use in satellite and
mobile services in the following countries:
o Philippines
o Indonesia
o El Salvador
Satellite Services Market
According to consulting firm Futron Corp., the global satellite services market
in 2003 was valued at $55.9 billion and has more than tripled in size from a
total market value of $15.8 billion in 1996.
In the Philippines, we are in discussions with a major domestic satellite
company regarding the potential integration of USM technology into their network
to increase transponder capacity, establish backhaul services that would be
competitive with fiber, and other potential applications. We cannot assure you,
however, that these discussions will result in significant future sales, if any,
for the Company.
In Indonesia, the Company is negotiating an agreement with a major reseller of
domestic satellite services concerning the potential deployment of USM
technology to deliver broadband Internet services through their satellite
network. We cannot assure you, however, that these negotiations will result in
significant future sales, if any, for the Company.
Mobile Communications
Philippines
In the Philippines, Gartner Dataquest expects mobile telephone penetration to
grow from 19.5% in 2002 to 29.8% in 2007. Mobile telephone service revenues are
expected to grow from US $1.3 billion in 2002 to US $2.4 billion in 2007.
The growth in mobile telephone services in the Philippines is expected to be
driven primarily by:
o Increased availability of prepaid services and enhanced
attractiveness of prepaid services through the introduction of
value-added services previously available only for postpaid services
o Falling costs of mobile services, facilitating fixed-to-mobile
substitution
o Entrance of new service providers in this market and expected
promotions and price competition making mobile services more
affordable and further expanding the addressable market
With respect to mobile wireless services, the Company is collaborating with an
established local partner that intends to deploy a new USM wireless voice
network that would be competitive with incumbent GSM service providers. The
Company anticipates this network to commence field trials in the 2005-2006
timeframe. We cannot assure you, however, that we will be successful in
eventually commencing field trials with this partner.
SALES AND MARKETING
The Company is planning to deploy its services in partnership with satellite
service providers, potentially licensing USM to a satellite operator, or
launching new mobile voice networks jointly with local partners. The Company
expects to generate revenues via either a royalty or profit share agreement with
customers.
We plan to develop strategic relationships with major telecommunications
equipment manufacturers in China and elsewhere in Asia and intend to leverage
their relationships with existing satellite and mobile service providers to
jointly deploy next generation network services. We intend to deploy our
products and services on either a regional or worldwide basis with such partners
and intend to leverage their highly trained technical support teams in order to
provide support to customers who utilize our services. We cannot assure you,
however, that we will be successful in deploying our products or services on
either a regional or worldwide basis with our partners and through their
relationships.
RESEARCH AND DEVELOPMENT
The wireless communications industry is continually evolving through rapid
changes in technology. This requires a consistent scientific and engineering
effort to enhance existing products and services as well as develop new advanced
products and applications. The Company believes that its future success depends
on the ability to quickly adapt to the rapidly changing satellite and mobile
wireless communications environment and the market trends for next generation
services. Therefore, the continued timely development of strategic products and
services is essential in maintaining the Company's competitive advantage.
Currently, the VoIP as well as the USM-based products and systems are being
developed by and in conjunction with our technology providers, including Photron
and others.
In the next few months, the Company intends to conduct additional
demonstrations, technology validation exercises, and field tests under different
satellite-oriented criteria designed to simulate a "real world" environment.
In future stages, aeroTelesis plans to create additional in-house technical
resources and expertise to expand its research and development and engineering
base. A substantial portion of the research and development efforts will be
dedicated towards the creation of new products, applications and services for
our growing target markets. We cannot assure you, however, that we will be
successful in the continued development of USM or that we will be successful in
the creation of new products, applications and services based on USM technology.
The Company did not expend any funds for research and development in the fiscal
years ended March 31, 2003 and 2004 beyond the stock it issued in connection
with the acquisition of ATP which had acquired the USM license which was valued
at $1,612,225. The Company anticipates that its research and development costs
for the fiscal year ended March 31, 2005 will be significant but cannot estimate
how much it will be at this time. Many factors will determine how much research
and development costs the Company will have to bear including the results of
planned future tests of the technology as well as new applications the Company
may wish to develop. The Company anticipates that its research and development
costs will continue to increase over the next several fiscal years as the
Company proceeds with its attempts to commercially exploit its USM technology
license and attempts to commence revenue producing operations.
SUPPLIERS
In order to effect the deployment of USM technology, aeroTelesis intends to rely
on strategic partners who will collaborate on the commercialization of digital
signal processing (DSP) chips and application-specific integrated circuits
(ASICs) that can be embedded in existing and future mobile base station and
handset equipment. We cannot assure you, however, that our strategy of relying
on strategic partners to collaborate on commercializing DSP chips and ASICs will
be successful.
COMPETITION
We will compete in the satellite and mobile communications equipment and
services market, providing solutions for transporting data, voice and video
traffic across traditional and IP based networks.
As we expand into our target markets, we will face competition from both
existing and new competitors, including existing companies with strong
technological, marketing and sales positions in those markets.
Our principal competitors within our currently targeted markets include the
following:
Satellite Equipment and Services
Equipment: Hughes Network Systems, Gilat Satellite Networks Ltd., and
ViaSat, Inc., among others, each of which offers a broad range of
satellite communications products and services.
Services: Global competitors in the satellite services industry include
PanAmSat, Intelsat, SES Global, and New Skies Satellites N.V. Regional
competitors in Asia and Latin America include Asia Satellite
Telecommunications Company Limited (AsiaSat) and Satelites Mexicanos, S.A.
de C.V. (SatMex), among other satellite service providers established by
the governments of many of the countries in the region.
Mobile Equipment and Services
Equipment: Global competitors include major technology developers, such as
Qualcomm; major semiconductor companies, such as Texas Instruments,
STMicroelectronics, VIA Telecom, NEC, Infineon and Philips; as well as
major telecommunication equipment companies such as Motorola, Nokia,
Ericsson and Matsushita. Additionally, many handset and base station
manufacturers in Asia such as Samsung and UT Starcom present competition
to the Company. The Company also faces competition from start-up ventures
offering alternative next generation broadband wireless technologies.
Services: Competitors include mobile carriers in the developing economies,
including UT Starcom-affiliated Xiaolingtong network, Millicom Inc.'s
network of local partners in Asia and Latin America, and incumbent
carriers in the emerging economies among others.
In partnership with local satellite service providers, we expect to compete with
certain services and products offered by providers of terrestrial fiber optic
networks, both on land and submarine. Although we compete with land-based and
submarine fiber optic network providers for the transmission of video, voice and
data, we believe that satellites have certain distinct advantages over fiber
optic cables in both developed and underdeveloped areas of the world. In
developed areas, satellite service providers enjoy a significant competitive
advantage over fiber optic cables because satellites provide point-to-multipoint
broadcasting services and the ability to bypass shared and congested terrestrial
links, thereby enhancing network performance. In underdeveloped areas, the
population density is often not substantial enough to warrant the investment
required to build fiber optic networks. For example, for a cable company to
cost-effectively offer cable television services and Internet services in an
underdeveloped region, it requires a critical mass of serviceable homes to
connect to the local cable head-end. Satellite service providers are not
similarly constrained in underdeveloped regions.
The disadvantages of using satellites versus fiber optic cables include:
o the proneness of satellites to electromagnetic and other physical
and environmental interference, including attenuation due to heavy
rain;
o the inherent latency of the communication caused by the long
distance a satellite signal has to travel while in transmission;
and,
o security and privacy issues as satellite communications that are
intended for only one destination are broadcast so that an entire
region can receive them and can potentially be intercepted by an
unintended party. Digital encryption of satellite data has been able
to address this concern to a certain extent.
GOVERNMENT REGULATION
The international communications environment is highly regulated. As we expect
to provide satellite and mobile communication services in conjunction with local
partners in our target markets, we will likely be subject to the regulatory
authority within those markets, including, but not limited to, the U.S.
government (primarily the FCC) and the national communications authorities of
the countries in which our local partners and we operate. The laws and
regulatory requirements relating to satellite communications and other wireless
communications systems vary from country to country. Some countries have
substantially deregulated satellite communications and other wireless
communications, while other countries maintain strict and often burdensome
regulations. The procedure to obtain these regulatory approvals can be
time-consuming and costly, and the terms of the approvals vary for different
countries. In addition, in some countries there may be restrictions on the
ability to interconnect satellite communications with ground-based
communications systems.
In addition, some of our products are incorporated into wireless communications
systems that are subject to regulation domestically by the FCC and
internationally by other government agencies. Regulatory changes, including
changes in the allocation of available frequency spectrum and in the commercial
and military standards which define the current networking environment, could
materially adversely affect our operations by restricting development efforts by
our customers, making current products obsolete or increasing the opportunity
for additional competition. Changes in, or our failure to provide products in
compliance with, applicable regulations could materially harm our business. In
addition, the increasing demand for wireless communications has exerted pressure
on regulatory bodies worldwide to adopt new standards for these products,
generally following extensive investigation and deliberation over competing
technologies. The delays inherent in this government approval process have in
the past caused and may in the future cause the cancellation, postponement or
rescheduling of the installation of communication systems by our partners, which
in turn may have a material adverse effect on the sale of our products to the
customers.
EMPLOYEES & CONSULTANTS
As of March 31, 2004, the Company had three (3) employees, including one (1) in
network engineering and research and development, and two (2) in corporate,
administration and production coordination. The Company also had six (6)
consultants, including two (2) in network engineering operations; one (1) in
marketing; one (1) in corporate finance; and two (2) in corporate communications
and investor relations.
It has been the Company's policy to initially engage the services of consultants
for a period of three (3) to six (6) months probation prior to extending an
offer for a full-time employment position. We expect that most, if not all, of
these consultants will transition into Company employees in the coming months.
Furthermore, the Company is continuing to build its management team, but plans
to expand its staff at a measured pace in order to limit corporate overhead.
None of our employees are covered by a collective bargaining agreement and we
have never experienced any strike or work stoppage. We believe that our
relations with our employees and consultants are good.