Published on

1 Like
  • Be the first to comment

No Downloads
Total views
On SlideShare
From Embeds
Number of Embeds
Embeds 0
No embeds

No notes for slide


  1. 1. August 5, 2003 Mark N. Hong, CFA T: 212.953.4919 F: 212.953.1025 (O T C B B: E P X R) Epixtar Corp. (OTC Bulletin Board: EPXR - $6.30) Industry: Call Center Services SB Research, Inc. and the analyst(s) who wrote this report, owns securities in this Company, which they received as compensation for writing this report and other follow-on research services to be provided to the Company through August 31, 2004 (see Disclosure Section). 52-Week Range $9.20 - $0.28 S&P 500 983 Market Cap $66.2 million Fully Diluted Shares Outstanding 11.4 million Avg. Daily Trading Volume (10 days) 31,900 EPS 2001A 2002A 2003E Q1 NA ($0.10) $0.19 Q2 ($0.21) NA Q3 ($0.08) Q4 $0.15 CY ($2.13) ($0.23) NA EBITDA ($1.0) ($1.7) NA Revenue $1.2 $26.3 NA Book Value (per share) $1.33 Tang. Book Value (per share) ($0.27) Cash (per share) $0.02 Debt / Equity 21.6% Insider Holdings 53% Institutional Holdings NA Dividend / Yield NM Source: ILX Systems Fiscal Year End Dec 31 # of Employees 58 E P I X T A R C O R P. Auditors Lehman, Goldberg & Drogin A = Actual; E = Estimates All Prices are as of the close August 4, 2003. Additional information is available upon request COMPANY KEY POINTS Over the past 2 years, Epixtar has successfully grown its revenues and reached profitability in the highly Successful Offshore Call Center Experience. competitive and fragmented call center services Currently using 6 offshore call centers and has trained industry. It has done so by taking advantage of the and supervised over 20 within the past 2 years. EPXR past decade's advances in telecommunication is the largest outbound call center outsourcing technology, which has increased the reliability of customer in the Philippines, with over 1,000 call international communication networks and center seats. significantly lowered the cost of bandwidth. With this combination, Epixtar is able to effectively access high Assembling 3 High Capacity, Call Centers in India quality labor in foreign countries at a significantly and the Philippines. With a total planned capacity of lower cost than in the US. 4,000 seats within 12 months. Shift from outsourced seat capacity to owned call centers, increasing Having proven its ability to train and manage over 20 operating margins and utilizing its marketing platform different offshore call centers facilities to sell its own for other clients. products, management now believes that the Company’s continued success will come from its Plans to Augment the Telemarketing of its expansion into the offshore telemarketing of third Proprietary Products with those of Third Party party products using its own call center facilities. Clients. Focused on Fortune 1000 Clients within the These facilities are expected to be up and running by Telecom, Computer Service Vertical Markets. November 2003. Double Digit Revenue and Earnings Growth in Past Two Quarters. Two quarters of year-over-year revenue and earnings growth.
  2. 2. EPIXTAR CORP. (EPXR) Company Overview Today, Epixtar Corp. (OTCBB: EPXR), A major risk to telemarketing firms is their reliance on headquartered in Miami, Florida is a fast growing and third party products to maximize productivity. During profitable provider of bundled ISP communication periods of economic decline and cut backs in services through offshore independent telemarketers marketing expenditures, telemarketing companies to US small and medium sized businesses. By the end suffer due to overcapacity and unused seats. Epixtar of 2003, the Company intends to be a leading provider believes that its ownership of proprietary products of offshore telemarketing services to US Fortune 1000 allows it to optimize “down time” and is a competitive companies. advantage during times of general economic weakness. Whereas competitors are left with high The cornerstone of Epixtar’s business is its ability fixed overheads within declining revenue, Epixtar to cost effectively train workers in offshore countries appears able to mitigate this risk. to market products to US businesses. What allows the Company to compete against existing large multi- Recent Developments billion dollar companies in the call center space is (i) July 28 – announced it has executed a its exclusive use of offshore telemarketing centers that Memorandum of Understanding with Global e- minimize college educated labor costs and (ii) its lack Services Pvt. Ltd, to acquire its Bombay-based call of sole dependence on third party products. Epixtar is center assets and for the lease and expansion of this presently working with 6 offshore call center facility. The 120-seat facility is currently undergoing companies in the Philippines, India and parts of the expansion and renovation and will accommodate Caribbean, where the cost of English speaking, 1,000 call center seats within six months of closing the articulate, college educated employees is significantly transaction -- anticipated to be on or before October lower than that of the average US high school 15, 2003. This will bring the total number of seats graduate. These labor cost savings are expected to be currently under development to 4,000. Epixtar has passed on to client companies, driving the Company’s agreed to take over the day-to-day operations of the long-term revenue growth. Management believes call center on August 4, 2003, and will begin utilizing 90% of its current representatives are college the center's capacity to market its ISP and educated. telecommunications services. Epixtar is in the midst of a two-fold transition. June 24 – announced it has finalized the first round First, the Company is switching from contracted third of equity financing consisting of convertible preferred party call centers to owning and operating its own call stock and warrants from several institutions and high- centers facilities. On May 30, the Company net worth individuals through the efforts of its announced that it had identified and has executed a investment bankers, Sands Brothers & Co., Ltd. (see Memorandum of Understanding to build a 1,000-seat disclosure section) call center in the West Bengal region of India. This platform facility is expected to be operational by year- May 30 – announced that it has executed a end and management plans to expand the facility to Memorandum of Understanding with the West Bengal 2,500 seats by 2005. Additionally, the Company is in Industrial Development Corporation Limited negotiations to acquire several existing call centers (WBIDC), an agency of the Calcutta-based West that may bring total seats up to 4,000 within 12 Bengal government. The Company has identified a months. Management believes that by owing its own premium site for its new facility and plans to establish facilities, margins may be significantly enhanced and a 1,000 seat call center facility in the West Bengal that it would allow the company to effectively manage region of India with operations slated to begin in early incoming and outbound telemarketing schedules. November, 2003. Management expects the center to grow to 2,500 seats by 2005. The second phase of the Company’s transition is to expand into the marketing of third party products and Management believes the $5.3 million venture will services. Presently, Epixtar is only marketing its own result in the first mega-center of its kind in the region. proprietary ISP products (see Products and Services The WBIDC will provide financial support as well as section). By focusing on the call center needs of assistance with site location, utility services Fortune 1000 companies, Epixtar expects to develop procurement, and all necessary legal and regulatory long-term relationships with clients that can provide clearances subject to a formal agreement. the Company with larger and longer lasting request for proposal (RFP) opportunities. Further, Fortune 1000 April 30 – Epixtar reported record-operating results companies typically have stronger, healthier balance for the first quarter ended March 31, 2003, with sheets than smaller companies and have the ability to revenues for the quarter of $12.4 million and net weather weakening economic environments. income of $1.9 million, or $0.185 per share after tax. 2
  3. 3. EPIXTAR CORP. (EPXR) This compares with revenue of $2.0 million and a loss Outsourcing / Offshore Competitive of $1.0 million, or ($0.10) per share, in the first Advantages For Third Party Clients quarter of 2002 as restated. – Outsourced call center services offer a flexible, more efficient and less costly alternative to in- Revenue in CY02 was $26 million compared with house personnel; $1.2 million in CY01 and the Company turn profitable for the first time in the fourth quarter. – Outsourced offshore call center service provides clients college educated service representatives at The Company attributes the positive results to the a lower cost that US high school labor; maturation of its customer base that resulted in reduced customer churn. In addition, the Company – Changing fixed, high capital intensive assets to a expanded the utilization of offshore customer contact variable cost; centers. The result has reduced the Company’s sales costs and has increased efficiency. – Access to the latest technologies and applications operated in a reliable, secure, maintained and Potential Catalysts highly scalable operations at significant cost 1. National Exchange Listing – Epixtar is currently savings; listed on the bulletin board exchange. If the Company decides and receives approval to list on a national – Frees up management’s attention to the exchange, the stock may experience increased company’s core business practices; visibility among other brokerage firms. – Ability to satisfy the growing demand for 24/7 2. The completion of the Company’s 1,000-seat customer service; flagship call center in Manila, Philippines or the announcement of a call center acquisition. Once the – Strengthen client brands and increase overall Company has control of its own facility, management customer satisfaction. anticipates expanding gross and operating margins. Financial Highlights 3. Signed Contracts with Fortune 1000 Clients. In order to prove out the Company's new business plan, it Upcoming Quarterly Revenue, 2002A – 2003A ($ millions) must be able to attract customers. Once service Quarter 2002A 2003E 1Q 2.1 12.4 quality credibility is attained, additional clients are 2Q 3.1 NA expected to follow. 3Q 8.0 4Q 13.1 4. Sustained Profitability. Thus far, Epixtar has Full Year 26.3 maintained profitability for the past two quarters. Source: Company reports Achieving a full year of profitability, especially in the Upcoming Quarterly Net Income, 2002A – 2003A ($ mm) midst of a large capital intensive build out of call Quarter 2002A 2003E center facilities would be a significant milestone. 1Q (1.0) 1.9 2Q (2.2) NA Company History 3Q (0.8) 4Q 1.5 Epixtar is the culmination of two acquisitions that Full Year (2.4) began on November 14, 2000, when the Company (at Source: Company reports that time, "Global Asset Holdings, Inc. Corp.") acquired an 80% membership interest in Margins, 2001A – YTD03A, LLC. SavOn was engaged in the 2001A 2002A 3/31/03A marketing and resale of domestic and international Gross Margin (41.6%) 32.3% 51.6% telecommunications services. On March 31, 2001, the Operating Margin (407.1%) (91.5%) 18.6% Company acquired 100% of the outstanding shares of Pretax Margin NM (91.5%) 15.7% Source: Company reports National Online Services, Inc., which provided Internet related services to small business subscribers. Balance Sheet Summary, 2001A – 2003E These services were marketed through independent 2001A 2002A 3/31/03A telemarketers. Although the Company has ceased Cash Equiv. 0.1 0.7 0.2 operations of SavOn, these acquisitions became the Total Assets 17.9 23.0 23.1 base from which the Company launched additional Total Liabilities 4.4 10.9 9.1 products in 2002. Shareholders’ Eq 13.5 12.0 14.0 Source: Company reports 3
  4. 4. EPIXTAR CORP. (EPXR) Capital Structure and Balance Sheet higher than its own products. As a result, during times For the past two quarters, Epixtar has achieved of slow third party telemarketing activity, Epixtar is positive cash flow and has generated almost $4 able to fill seats with outbound telemarketing sales of million in net income. The first quarter’s performance its own products. was on top of very strong over year revenue growth of 498%. These results, in addition to the capital it Exhibit 2. Epixtar Business Activity recently raised through Sands Brothers & Co., Ltd. will assist the Company in its plans to build out its own facilities and to make strategic acquisitions. As of March 31, 2003, gross margins have expanded to 51.6% of sales and operating margins have grown to 18.6%. However, with a working capital deficit of ($1.2MM), the Company’s ability to grow and take advantage of new opportunities in constrained. However, several more quarters of positive results may alleviate this problem. The Company is currently using two billing Principal strategies include: companies. One billing company in addition to a traditional factoring company is providing short-term Building Long-term Client Relationships. By liquidity of the Company’s receivables. providing superior quality service. Today, Fortune 1000 companies are seeking to diversify its dependence on any single call center provider. Strategy Epixtar intends to capture market share from existing Epixtar's objective is to continue to grow its call center providers by providing clients a low cost operations and enhance profitability by leveraging its alternative and to grow its market share by providing experience in offshore call center management and superior quality service. training to service Fortune 1000 companies. Its goal is to become a leading provider of high quality, reliable Capitalize on Global Service Offering in and affordable outsourced customer attraction and Offshore Markets. Epixtar currently utilizes 6 management solutions. Services are customized to offshore call center facilities, representing 400 seats. address each client’s unique needs and focused on Over the past 2 years, the Company has used as many improving the quality and cost-effectiveness of the as 20 different call centers and over time, clients’ existing business needs. Management has gained significant insight and experience in the supervision and training of offshore Call centers aim to win consistent, long-lasting facilities. Management believes it is this experience RFPs in order to maintain a steady flow of revenue that will drive superior quality service and customer and to occupy as many call center seats as possible. acquisitions. Unfortunately, reductions in marketing expenses, cancellations of projects, and general economic Vertical Market. Targeted vertical markets weakness can cause wide fluctuations in revenue and include telecommunications, financial services, debt operating performance. collection and technology industries. It is within these industries that the firm’s experienced management Exhibit 1. Traditional Call Center Activity team has industry contacts that may allow it to gain traction quickly. Quality Assurance. Over the past several months, the Company has taken steps to insure correct billing and proper customer acquisition. The current process as illustrated in Appendix 2 shows that after a customer lead has been received and filtered through federal, state and company DNC lists, it is then sent to a customer representative to make a sale. A sale is made once (1) the customer agrees to subscribe to the Epixtar hopes to smooth out the fluctuations with service, which is recorded and reviewed internally by the telemarketing of its own suite of products. The Epixtar’s internal Quality Assurance team, and (2) the gross margin of outsourced third party products is recording is cleared by an independent third party 4
  5. 5. EPIXTAR CORP. (EPXR) verification company. At this point, a notification e- Industry mail is sent to the client welcoming him to the service Historically, businesses have relied on in-house and then a Welcome Package is sent by mail. Once personnel to provide customer sales and service. the package is received, the 30 day free trial period However, recently businesses are increasingly begins. Fifteen days into the free trial period, an outsourcing business processes to other firms in order intent to bill notification is sent to the client by mail to (i) focus more internal resources on core business and by e-mail. This allows the client time to respond practices, (ii) increase the productivity of their without being charged. Customers are only charged marketing services, (iii) and reduce the overall cost of after the It is only after the 30 free trial period. To marketing expenditures. Typically, call center service take customer care and quality assurance one step providers offer clients lower overall telemarketing further, Epixtar has instituted a complete refund policy costs due to economies of scale in sharing the cost of whereby customers who have a complaint may be new technology among a larger base of users and completely reimbursed. Customers have been higher capacity utilization rates. The result is completely reimbursed even having subscribed for enhanced end user experience, strengthened company over 3 months. brands and maximized value to customers. Sales and Marketing Today, the $22 billion call center services industry Fortune 1000 companies demand that their service is extremely competitive and highly fragmented with providers own their own call centers in order to have approximately 6,000 companies worldwide vying for more control over its employees. As a result, Epixtar a piece of the Fortune 1000 marketing budget. is building its own facilities as opposed to relying on Although the top 15 companies in the industry contracted offshore facilities. Management has stated represent $ 1.15B in total revenue, they only account that it expects its owned facilities to be up and running for 20% of the total market, and the total market is by November 2003. declining. Call center service providers are suffering due to the weak US economy, and clients are Sales and marketing to the Company's new client demanding higher quality service at lower cost. base is driven and supported by the Company's Further, US call center providers are facing rising executive management team. Until the Company’s wages, pensions and healthcare expenses, which are facilities are up and running, heavy marketing may be further pressuring margins. The result is the need to effective. See Company Bios. find high quality labor at a lower cost; hence, the move offshore. In fact, offshore call center activity is Clients growing as more and more companies are building Call center service providers typically serve clients new facilities or making acquisitions in areas like that seek to telemarket or provide customer care for Calcutta, Bombay and the Caribbean. In fact, their own products. The dominant players in the Convergys, the industry leader announced on May 21, industry are virtually all focused on the Fortune 1000. that it plans to construct a 880 workstation facility in Even worse, they are focused on the same lucrative the Philippines. vertical markets. While large US corporations expand their Epixtar differentiates itself by servicing two sets of operations offshore, they remain anchored by their clients. Rather than just servicing the clients of the large US facilities, which leaves their per seat cost at a Fortune 1000, Epixtar has its own client base of over relatively high rate. Epixtar uses exclusively offshore 230,000 US small and medium sized clients. The call center facilities. The result is Epixtar’s ability to advantages of having its own client base include (i) bid on projects that may be below the cost structure of diversification of revenue and independence from many competitors. relying on third party marketing activity, (ii) possessing a leveragable client base to upsell Projects are segmented into either inbound or additional B-to-B products, and (iii) provides a outbound call center services. Inbound transactions valuable asset that potential suitors interested in a include customer care and maintenance services, large client may find attractive. which accounts for over 70% of all inbound transactions and order taking and sales, which account The average length of client retention under the for the remaining 30%. The average inbound Company’s ISP product has increased over the past customer service call is priced between $25 - $32 per several months to 6 months as a result of the maturity hour. Demand for inbound order taking is expected to of its client base. increase as the effects of Do Not Call lists reduces the effectiveness of outbound telemarketing and advertising through direct mailings and television 5
  6. 6. EPIXTAR CORP. (EPXR) advertising becomes a primary medium of customer Proprietary Product Offering acquisition. Epixtar has four primary brands of ISP services (NOL, Liberty Online, B2B Advantage, and Outbound transactions take the form of sales and Ameripages) each offer small business customers telemarketing, which represents over 90% of all value-added ISP services billed to the subscriber's transactions. Customer care and maintenance services local phone bill at $29.95 per month. These services account for the remaining 10% or so. The average substantially represented all of the Company’s 2002 cost of outbound service is between $22 and $28 per revenues of $26 million and Q1 2003 revenues of $12 hour. According to the Federal Trade Commission million. (FTC), as many as 104 million calls are made every day. Telemarketing remains one of the most effective ISP Services. These services offer customers a marketing mediums generating $660B in sales on turn-key Internet marketing and access solution that $28.4B in telemarketing expenditures in 2001, provide a Web presence with unlimited Internet according to Direct Marketing Association estimates. access, e-mail service, customized Web site Not included in this statistic is the debt collections development and hosting, directory listings and search industry, which according to the 2001 Kaulkin Report, engine notification for a single monthly fee of $29.95. represents approximately $13 billion in revenue. More Customers also get a one-month free service trial importantly, the outsourced portion of the industry period. These services are marketed under the trade grew at an accelerated pace of 25% to 30% annually. names National Online Services, Liberty Online, B2B Advantage and Ameripages. Federal Do-Not-Call List Do Not Call (DNC) lists have been around for years The Company’s core customer network with 20 or so states having already instituted their own infrastructure is maintained in collocation facilities legislation. They were created to limit customer equipped with redundant systems located in Virginia annoyances from telemarketers. and Florida. All management of the systems takes place from the corporate offices in Florida. Recently, the Federal government has opened the registration doors for consumers to register their B2B Advantage is the Company’s most recent resident phone numbers on a national DNC list. The product offering that is geared towards providing a new Federal DNC has been extremely popular with small business owner both ISP services and access to 635,000 telephone numbers registered on the first day, a legal and accounting portal. This portal allows 12.5 million telephone numbers logged in as of July 1, subscribers access to attorney referrals, legal and 14 million numbers being automatically document templates, and financial consultations. transferred to the federal list from various state DNC lists. The DNC is expected to block about 80% of The Company has signed on two billing companies telemarketing calls, according to the Federal Trade that work with local exchange carriers to provide a Commission (FTC). This list will be effective seamless billing and processing execution. Epixtar’s October 1, 2003 and violations will result in a $11,000 services are invoiced on the customer’s existing fine per incident. monthly phone bill, making customer payments easier. Further, by using a billing intermediary, Epixtar Although the Federal and State DNC lists are only enjoys the benefits of account factoring services and applicable to resident phone numbers, there will be an collection. impact on Epixtar’s proprietary products business, which is only Business to Business (B-to-B). While Customers are billed through local telephone there will be increased inbound work as advertising service providers and can cancel at any time. Of the though mailings and television advertisements 230,000 subscribers, the average client has been with increases, there may be increased competition in B-to- the Company for 6.5 months. The average is expected B sector as Business to Consumer (B-to-C) begins to to increase as the size of retained customers increases suffer. Also, business consumers are likely to and as the Company refines its product. mistakenly list business numbers on DNC lists and there will probably be significant confusion as it Customer acquisition is done by outbound relates to businesses operated out of the home office. telemarketing to small US businesses. Telecommunication services are currently being The biggest effect will be the necessity to properly performed by 6 third party call centers located in the train employees to upsell products and services on Philippines, India and the Caribbean. It is through the increasing inbound calls. Company’s experience in working with and training these workers that the Company believes that it can properly manage its own facilities. Presently, the cost 6
  7. 7. EPIXTAR CORP. (EPXR) of new customer acquisition is approximately $30. · Performance based pricing model On going costs of servicing a client is $2. Once new · Higher quality call center reps with 90% facilities are put in place, the Company expects to having been college educated save $6 per client on acquisition cost. · Flexibility without bureaucracy Customer Service. Telemarketing has become a commodity business, with customer service being the Management differentiating factor. The Company has 16 full time Epixtar has assembled an experienced team of customer service employees in the US, 9 in the industry professionals that understand the call center Philippines. Epixtar has a country manager in India market dynamics and the industry’s current migration and is in the process of hiring 2 more. to offshore telemarketing. The Company’s Miami facility hosts these professional whose expertise range Telecommunication Services. Epixtar provides from knowledge of regulatory compliance to business users a comprehensive long distance telemarketing training. telecommunications solution through the One Nation Calling Plan, provides long distance, travel card, and Martin Miller – CEO, Chief Officer of the Board, toll-free access at attractive rates. age 63, joined Epixtar's Board in November 2002. Mr. Miller has been a private investor for the last five Competition (See Appendix 1) years. During part of this period he also acted as a United States manager of corporate finance for a Epixtar competes in an extremely fragmented foreign investment group. industry. While many companies provide customer management solutions and outbound customer William D. Rhodes Jr. – President, CEO, Director, acquisition services, Epixtar believes no one company Epixtar Group: age 55, joined Epixtar in 2000 and was is dominant in the industry. There are numerous and promoted to president of Epixtar Corp. and Board varied providers of such services, including firms Member in November, 2001. From 1976 to 1996 he specializing in various customer management served as an executive at Rockwell International. solutions, niche and large market companies, as well While there, he played key engineering and marketing as companies that manage their customer support roles in the GPS program as well as led the needs in-house. Epixtar faces significant competition development and commercialization of several from companies that possess substantially greater military communication systems. Subsequent to that, resources, greater name recognition and a more he served as President and Chief Operating Officer of established customer base. ValuLine Telecommunications as it developed into Advanced Communications Group through an NYSE Epixtar believes that the most significant IPO and merger and later served as Chief Operating competitive factors in the sale of services include low Officer for Equalnet Communications Corp., a cost offshore college educated labor, superior service NASDAQ-traded telecommunications firm. quality, reliability, scalability, offshore industry experience, and tailored service offerings. Irving Greenman – Chief Financial Officer, Competition for contracts for many of Epixtar’s Director: age 67, has been CFO of Epixtar since 2000. services is in the form of competitive bidding in A leader in financial management working in the response to requests for proposals (RFPs). media, entertainment and healthcare fields for over forty years, he was chief financial officer for Many of Epixtar’s potential clients contract call Kaleidoscope Media Group, Inc., Medica Media, and center services providers primarily from a limited Healthcare International. Mr. Greenman is a Certified number of preferred vendors. Epixtar must be Public Accountant in New York and Florida. He is prepared to exert pricing pressure on these vendors in also on the Board of Directors. order to gain market share. These companies also require vendors to own their call center facilities. David Srour – President, Epixtar Corp. 42, joined Until the Company’s facilities are operational, Epixtar in November 2001, as chief operating officer. customer attraction will be limited. Prior to joining the Company, he was a manager at Ernst & Young Consulting and a senior manager at Competitive Advantages KPMG Consulting, Inc. where he led client service · Ability to submit request for Proposals teams in the implementation of Internet-based (RFPs) for projects below that cost structure technologies for clients General Motors, Simon of larger competitors. Property Group and Lehman Brothers. He also held · Two years of offshore call center the position of chief operating officer at iTelsa and management and training experience SmarTel Communications. 7
  8. 8. EPIXTAR CORP. (EPXR) Gerald M. Dunne – Senior Vice President, Chief Department of the City of New York (Queens Marketing Officer: age 40, joined Epixtar in June College) for more than 12 years. Elan received his 2001. Formerly he was the Chairman & CEO of juris doctor from the University of Baltimore School Group Long Distance Inc., a NASDAQ traded long of Law in 1977. He is the former law colleague of distance reseller. Mr. Dunne led GLD to over 200,000 Epixtar General Counsel, Michael D. DiGiovanna. business subscribers before leaving to join Epixtar. Risks Ricardo Sablon – Vice President, Chief Technology Transition Risk. As Epixtar evolves into a provider Officer: age 43, became Epixtar's CTO in 2000. of third party products, there is significant risk that the Previously he was vice president and chief telephony Company will be unable to attract its target market engineer for Equalnet Communications Corp. Mr. customers. Sablon was also a founder of FreeCaller Communications. While there, he developed and Labor Pool. Call centers are highly labor intensive. managed the underlying technology for advertiser- With large call centers being built offshore, there is a sponsored long distance service, which he patented. risk that qualified employees may be limited. Harry B. Fozzard II – Vice President, Chief Financially Constrained. As of March 31, cash and Information Officer: age 38, joined Epixtar in June of cash equivalents were $242,209. Since then, the 2002. Prior to his arrival, he was the founder and CEO Company has raised an additional $2.35MM through a of an eLearning company, LeanForward, Inc. Prior to private placement in which Sands Brothers & Co., acquisition, Mr. Fozzard led LeanForward to projects Ltd. acted as the Company’s financial advisor. Sands for several Fortune 500 organizations including Brothers is a related entity to SB Research, Inc. Sprint, the State of Florida, Sunglass Hut, Ford Motor Epixtar may need to raise additional capital in the near Company, Shell, Texaco, and Pennzoil-Quaker State. term in order to finish the build out of its facilities. Deborah Gambone, Esq. – Vice President, Corporate Competition from better capitalized competition. Counsel & Corporate Secretary: age 51, joined Epixtar As previously indicated, the call center services in December of 2001. Her previous experience industry is highly competitive and fragmented. Many includes corporate counsel duties at several competitors are better capitalized and have strong technology and software firms. In her capacity as relationships with Epixtar’s target market clients. corporate counsel, Mrs. Gambone was responsible for contract agreements and negotiations, liaison activities The Company is listed on the OTC Bulletin Board with numerous state and federal agencies. and is also a micro-cap stock. Risks associated with owning shares in micro-cap securities include price Kurt Protzman – Senior Vice President, 36, Business volatility, liquidity, and lack of exposure within the Development, joined Epixtar in April of 2003 having investment community. It may be difficult to spent the past several years managing his own purchase or sell significant positions in the security company Direct Marketing Development, Inc. Before due to low trading volume. Even small purchases or that, he was a Vice President and General Manager at sales may have a large impact on the stock’s price. SITEL handling strategic accounts. Prior to SITEL, he was VP and General Manager at TranscomUSA, Customer complaints to regulatory. Epixtar is Inc. another call center facility in Indianapolis, IN. regulated by the Federal Trade Commission and is subject to State regulations. The state of Missouri has David Berman – Director, age 56, has been a board placed a preliminary injunction baring Epixtar from member of Epixtar Corp. since September 2001. Mr. placing charges on the phone bills of Missourians Berman is a practicing attorney and partner for without their express verifiable authorization or Berman & Berman, a Miami firm specializing in tax otherwise misrepresenting facts to consumers. law. He was formerly senior trial attorney for the district counsel of the Internal Revenue Service of the Downward pricing pressure. As previously stated, United States. telemarketing is a commoditized industry and price is commonly a deciding factor when selecting an Kenneth Elan – Director, 50, is an attorney outsourced provider. As competitors increase their specializing in commercial litigation with extensive offshore competencies, margins may be compressed. experience in the prosecution and defense of complex corporate and securities cases. Elan is a member of the Overall poor economic conditions. The Company’s New York County Lawyers Association and formerly new business is targeting the marketing budgets of a member of its Committee on Corporation Law. He other companies. As economic conditions deteriorate, was an Adjunct Professor in the Accounting marketing budgets commonly shrink. 8
  9. 9. Exhibit 1 4Q01 1Q02 2Q02 3Q02 4Q02 1Q03 (Restated) (Restated) (Restated) (Restated) ASSETS Current Assets: Cash and cash equivalents 73,883 16,391 138,822 165,255 722,674 242,209 Accounts Receivable (net of reserves) 731,511 946,593 638,883 2,201,080 3,802,326 4,326,210 Prepaid expenses and advances 1,666 2,192 10,595 21,445 59,940 11,596 Debt restructuring costs - current portion - - - - 500,000 500,000 Deferred billing costs 35,500 78,681 156,925 301,634 154,246 277,309 Total current assets 842,560 1,043,857 945,225 2,689,414 5,239,186 5,357,324 Property and equip, net 201,466 370,282 367,571 400,702 406,971 448,356 Debt-restructuring costs - non current portion - - - - 458,333 333,333 Goodwill (net of amortization) 16,801,359 16,801,359 16,801,359 16,801,359 16,801,359 16,801,359 Security Deposits 33,996 21,051 24,813 25,158 76,716 135,101 Total Other Assets 16,835,355 16,822,410 16,826,172 16,826,517 17,336,408 17,269,793 Total Assets 17,879,381 18,236,549 18,138,968 19,916,633 22,982,565 23,075,473 LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) Current Liabilities: Notes payable 2,649,000 2,649,000 2,663,712 2,900,678 404,466 404,466 Accounts payable 1,176,943 1,605,207 2,796,009 3,744,679 3,211,934 3,229,738 Accounts payable - subject to compromise - - - 385,401 385,401 385,401 Accrued expenses and taxes 127,325 285,576 727,576 968,125 1,398,664 834,552 Deferred revenue 355,001 622,130 1,061,667 2,202,108 2,897,693 1,227,528 Capitalized lease obligations - current portion 29,861 94,004 94,169 95,506 79,320 74,027 Corporate Income Tax Payable - - - - - 389,672 Total Current Liabilities 4,338,130 5,255,917 7,343,133 10,296,497 8,377,478 6,545,384 Long-Term Liabilities: Note payable - - - - 2,474,000 2,474,000 Capitalized lease obligations - non-current portion 30,514 113,932 100,368 106,705 88,451 71,575 Loan payable 22,212 22,212 - - - - Total long-term liabilities 52,726 136,144 100,368 106,705 2,562,451 2,545,575 Total liabilities 4,390,856 5,392,061 7,443,501 10,403,202 10,939,929 9,090,959 Commitments and Contingencies Stockholders' Equity: Common stock, 50,000,000 shares authorized and 10,503,000 shares issued and outstanding in 2003 and 2002, respectively 10,503 10,503 10,503 10,503 10,503 10,503 Additional paid in capital in excess of par value 30,757,997 30,757,997 30,757,997 30,757,997 31,757,997 31,757,997 Accumulated deficit (17,279,975) (17,924,012) (20,073,033) (21,255,069) (19,725,864) (17,783,986) Total stockholders' equity 13,488,525 12,844,488 10,695,467 9,513,431 12,042,636 13,984,514 Total liabilities and stockholders' equity 17,879,381 18,236,549 18,138,968 19,916,633 22,982,565 23,075,473 9
  10. 10. Exhibit 2 INCOME STATEMENT ANALYSIS, 2001A - 1Q03A FY01 1Q02 2Q02 3Q02 4Q02 FY02 1Q03 (Restated) (Restated) (Restated) (Restated) Revenues 1,189,723 2,066,131 3,094,740 7,974,025 13,115,955 26,250,851 12,366,775 Cost of sales 1,684,615 1,607,815 3,272,680 6,133,040 6,768,432 17,781,967 5,983,628 Gross profit (loss) (494,892) 458,316 (177,940) 1,840,985 6,347,523 8,468,884 6,383,147 Gross Profit Margin (%) -41.6% 22.2% -5.7% 23.1% 48.4% 32.3% 51.6% - Expenses: - Selling, general and administrative 2,298,048 1,363,820 1,868,929 2,458,341 4,542,439 10,233,529 3,849,705 - Income (Loss) from operations (2,792,940) (905,504) (2,046,869) (617,356) 1,805,084 (1,764,645) 2,533,442 - Interest expense 90,597 71,560 77,883 146,542 243,384 539,369 165,893 Depreciation 6,817 13,724 24,269 28,068 32,496 98,557 35,999 Amortization of purchased intangibles 1,950,241 - - - - - - 2,047,655 85,284 102,152 174,610 275,880 637,926 201,892 - Income (Loss) from continuing operations (4,840,595) (990,788) (2,149,021) (791,966) 1,529,204 (2,402,571) 2,331,550 Loss from discontinued operation (1,551,537) (16,406) (26,035) (877) - (43,318) - (write-off of goodwill) (10,126,955) - - - - - - - Net Income(loss) before taxes (16,519,087) (1,007,194) (2,175,056) (792,843) 1,529,204 (2,445,889) 2,331,550 - Less: Provision for Corporate Income Taxes - - - - - - 389,672 - Net Income(Loss) (16,519,087) (1,007,194) (2,175,056) (792,843) 1,529,204 (2,445,889) 1,941,878 EPS (2.13) (0.10) (0.21) (0.08) 0.15 (0.23) 0.19 Weighted Avg Shares 7,758,693 10,503,000 10,503,000 10,503,000 10,503,000 10,503,000 10,503,000 10
  11. 11. Exhibit 3 Statement of Cash Flows (Restated) FY01 FY02 1Q03 Cash Flows from Operating Activities: Net (loss) (16,519,087) (2,445,889) 1,941,878 Adjustments to Reconcile Net Loss to Net Cash (Used in) Operating Activities: Depreciation and amortization 3,798,922 140,224 160,999 Write-off of goodwill 10,126,955 - Changes in Assets and Liabilities: (Increase) in accounts receivable (716,215) (3,070,815) (523,884) (Increase) Decrease in prepaid expenses and advances 897 (58,274) 48,344 (Increase) in deferred billing costs (35,500) (118,746) (123,063) (Increase) in deposits (30,973) (42,720) (58,385) Increase in accounts payable and accrued expenses 960,455 3,306,330 (546,308) Increase in Corporate Income Tax payable ?same as below? 389,672 Increase in accounts payable - subject to compromise - 385,401 - Increase in deferred revenues 355,001 2,542,692 (1,670,165) Net cash (used in) provided by operating activities (2,059,545) 638,203 (380,912) Cash Flows from Investing Activities: Acquisition of fixed assets-net of disposals to subsidiary (127,094) (304,062) (77,384) Net cash (used in) investing activities (127,094) (304,062) (77,384) Cash Flows from Financing Activities: Increase in notes payable and capitalized lease obligations 2,424,375 624,282 - Repayment of notes and loans payable and capitalized lease obligations - (309,632) (22,169) Acquisition of goodwill (net of non-cash) stock issuance (225,000) - Issuance of stock for services 13,500 - Investment in subsidiary 1,000 - Net cash provided by financing activities 2,213,875 314,650 (22,169) Increase in cash 27,236 648,791 (480,465) Cash, beginning of period 46,647 73,883 722,674 Cash, end of period 73,883 722,674 242,209 Income tax - - - Interest paid 6,925 306,396 86,101 11
  12. 12. Exhibit 4 Comparable Analysis 2002A 1Q03A Price as of August 4, Mkt Cap Rev Growth EBITDA EBITDA EBITDA EBITDA Symbol Company 2003 ($MM) Rev (Y/Y) EPS (TTM) Margin Rev EPS ($MM) Margin Public Comps CVG Convergys Corp. 16.95 2,507.9 2,286.2 (1.5%) 1.35 498.1 21.8% 560.4 0.26 100.2 17.9% SYKE Sykes Enterprises Inc. 6.32 254.7 452.7 (8.7%) 0.16 44.4 9.8% 117.3 0.00 8.9 7.6% SWW SITEL Corp. 1.28 95.2 770.2 6.2% 0.16 64.4 8.4% 194.1 0.00 13.3 6.9% WSTC West Corp. 24.47 1,622.3 820.7 5.2% 1.01 168.3 20.5% 216.2 0.30 49.1 22.7% APAC APAC Customer Services 2.75 136.0 371.2 (13.4%) 0.25 41.0 11.1% 86.2 0.04 6.9 8.0% TTEC Teletech Holdings Inc. 4.08 302.2 1,017.4 11.1% 0.33 105.9 10.4% 245.8 0.03 19.3 7.8% Average (0.2%) 13.7% 11.8% EPXR Epixtar Corp. 6.30 66.2 26.3 111.7% (0.23) (1.8) (6.7%) 12.4 0.19 2.5 20.2% Figures are as of FY End. Sales $M Mar-02 Jun-02 Sep-02 Dec-02 Mar-03 EPS Mar-02 Jun-02 Sep-02 Dec-02 Mar-03 CVG 588 573 561 565 560 CVG 0.35 0.35 0.34 0.31 0.26 SYKE 117 113 110 114 117 SYKE 0.08 0.07 0.03 (0.02) 0.00 SWW 193 197 191 190 194 SWW 0.04 0.05 0.01 0.06 0.00 WSTC 211 195 199 216 216 WSTC 0.33 0.30 0.20 0.18 0.30 APAC 104 94 85 98 86 APAC 0.06 0.07 0.04 0.08 0.04 TTEC 254 254 252 258 246 TTEC 0.09 0.09 0.08 0.07 0.03 EPXR 2 3 8 13 12 EPXR (0.10) (0.21) (0.08) 0.15 0.19 12
  13. 13. Appendix #1 – Competitor Profile 2002 Sales 1 Yrs Sales 2002 NI 2002 Company Website: Symbol ($M) Growth ($M) Employees Convergys Corporation NYSE: CVG 2,286 (1.5%) 145.9 48,800 Spherion NYSE: SFN 2,117 (22.0%) (903.3) 310,000 TeleTech Holdings, Inc. TTEC 1,017 11.1% (16.7) 28,000 West Corporation WSTC 821 5.2% 68.6 24,000 SITEL Corporation NYSE: SWW 770 6.2% (9.8) 23,000 SR. Teleperformance* Euronet Paris: RCF 732 49.3% 34.0 19,879 Sykes Enterprises Nasdaq SYKE 453 (8.9%) (18.6) 15,750 ClientLogic Corporation Toronto: OCX 399 3.6% NA 11,400 APAC Customer Services, Inc. Nasdaq: APAC 371 (13.4%) 6.2 12,600 ICT Group, Inc. Nasdaq: ICTG 299 24.9% 3.0 11,200 RMH TeleServices Nasdaq: RMHT 239 36.5% (17.5) 13,486 Telespectrum Worldwide OTC: TLSP 218 (28.1%) (83.2) 5,782 Aegis Communications Group OTC: AGIS 136 (42.7%) (62.3) 4,500 * Figures are 2001 Convergys Corporation provides outsourced services to clients in financial services, telecommunications, and Internet services industries. Its Customer Management Group (CMG) provides customer service, technical support, and telemarketing for clients through more than 45 contact centers worldwide. Its Information Management Group (IMG) processes about 50 million bills a month from its data centers, provides consulting services, and licenses its data processing software. West Corporation providers outsourced teleservices, with more than 30 call centers and seven automated voice and data centers. Clients include AT&T, Dell, and Microsoft. West's services include inbound call handling (customer service, product support, order processing) and outbound calls (product sales, customer acquisition and retention). West Corp. also offers computerized call processing services and Web-based services. TeleTech Holdings, Inc. services Fortune 1000 clients with customer relationship management (CRM) services through than 50 "customer interaction centers" across the globe. Among its offerings are customer acquisition, service, and retention programs; customer satisfaction and loyalty programs; customer data management services; and consulting and marketing services. Clients include American Express, Blockbuster, Citigroup, AT&T, and Microsoft. SITEL Corporation provides inbound call handling for customer service requests, technical support, and order taking. SITEL also offers outbound telemarketing, database and list-building services, and direct response marketing. The company has more than 80 call centers in 20 countries and boasts more than 300 corporate clients. Four units of General Motors account for nearly 25% of sales. APAC Customer Services, Inc. provides outsourced telephone-based customer-management and acquisition services. It operates about 32 call centers in about a dozen states. APAC's customer management services include customer retention, help-line information, direct mail response and order entry services. Clients include companies in the parcel delivery, pharmaceutical, telecommunications, retail, and financial services industries. United Parcel Service accounts for nearly 15% of sales and Citigroup, Inc. for 11%. ClientLogic Corporation provides outsourced customer management and order fulfillment services through almost 50 facilities in 10 countries. The company offers multi-channel customer service, technical support, and order placement services through its 33 call centers, while its four fulfillment centers handle inventory management, packaging, and shipping. With clients such as Earthlink, Handspring, Sony, and TiVo, ClientLogic also provides marketing and support services, including database management and e-commerce. The company is owned by Canadian conglomerate Onex. Spherion provide traditional temporary staffing, it has expanded its services to include professional and executive recruitment and employee consulting and assessment. In addition, Spherion provides staffing and technology services in such areas as project management, quality assurance, and data center and network operations. Its outsourcing 13
  14. 14. division offers customer care and administrative and support services. Spherion operates through a network of some 820 offices in Asia, Australia, Europe, and North America. Sykes Enterprises operates 40 technical help and customer service centers in Africa, the Americas, Asia, and Europe using phone, e-mail and chat to serve those in need of help. It also provides large corporations with technical staffing and consulting relating to customer relationship management (CRM). Sykes also provides multi-lingual order processing and fulfillment through its european operations. The company's top ten clients made up more than half of 2002 revenues. SR. Teleperformance Group is the largest telemarketing firm in Europe with nearly 150 call centers in about 30 countries (covering more than 25 languages). The company handles inbound and outbound calls in marketing, sales, and customer service. It also provides a full range of marketing services -- including research, identity and image creation, and operational marketing -- through some 60 specialist companies throughout Europe. In addition, its SR.Marketing Services operates firms dedicated to health care marketing and advertising and pharmaceutical clinical trials. RMH TeleServices provides inbound and outbound calling services through its 22 call centers in the US, Canada, India, and the Philippines. It offers such services as telemarketing, customer retention, and follow-up calling, as well as e-mail management, technical support, and order processing. RMH is involved in such industries as telecommunications, financial services, and insurance with the likes of AT&T, MCI, Microsoft, and Providian as clients. ICT Group, Inc. handles outgoing and incoming calls from about 49 call centers in Australia, Europe, and North America. Its services include marketing research, sales support, consulting, and e-commerce support for clients in such fields as insurance and financial services (which together account for more than half of sales), as well as information technology and telecommunications. ICT's clients include Aegon Life Insurance, America Online, Capital One, and Pfizer. Aegis Communications Group, Inc. provides outsourced telemarketing and customer care services through a dozen call centers in the US. The company handles both inbound and outbound calling services, order provisioning, and multilingual communications programs, among other services. In addition to teleservices, Aegis offers online customer services such as e-mail responses, real-time chat, and data collection. Major clients include AT&T, American Express, and Qwest Communications. Telespectrum Worldwide provides telemarketing and customer care services to FORTUNE 500 companies in the financial services, insurance, pharmaceutical, telecommunications, and utility industries, among others. The company manages and operates 10 call centers, through which it handles incoming customer inquiries and places outbound telemarketing calls on behalf of clients. Its b-to-b Internet subsidiary, eSatisfy, measures and monitors customer satisfaction. 14
  15. 15. EPIXTAR CORP. (EPXR) Appendix 2 – Sale & Compliance Process 16
  16. 16. EPIXTAR CORP. (EPXR) DISCLOSURE SECTION STOCK RATING DISTRIBUTION (as of August 4, 2003) Coverage Universe Investment Banking Clients Stock Rating Category Count % of Total SB Research, Inc. does not provide Buy - - investment banking services. Speculative Buy - - Neutral - - Sell - - No Rating EPXR 1 100.0% Total 1 100.0% ANALYST STOCK RATINGS The following guide is provided to help investors understand the recommendations of the firm. BUY. The common stock’s total return is expected to exceed the average total return of the S&P 500 Index or Nasdaq Composite by 15 percentage points over the next 12-18 months. SPECULATIVE BUY. The common stock’s total return is expected to provide a total return that is at least 10 percentage points greater than that of the S&P 500 Index or Nasdaq Composite over the next 6 months. NEUTRAL. The common stock is expected to provide a total return that does not generally outperform or underperform the S&P 500 Index or Nasdaq Composite over the next 12-18 months. SELL. The common stock is expected to provide a negative total return that is at least (5) percentage points greater than that of the S&P 500 Index or Nasdaq Composite over the next 6 months. NO RATING. SB Research has received compensation in the form of cash and/or securities from the Company on behalf of the report. Conflicts of Interest: SB Research, Inc. will be paid $2,000 per month for a minimum of 12 months and 2,500 warrants to purchase Epixtar common stock to prepare this report. SB Research, Inc. compensates research analysts for activities and services intended to benefit the firm’s investor clients. Individual compensation determinations for research analysts, including the author(s) of this report, are based on a variety of factors, including the overall profitability of the firm and the total revenue derived from all sources. The author(s) of this report and/or members of their households may own position in the Common shares of EPXR. Sands Brothers & Co., Ltd. (Sands Brothers) is the financial advisor to Epixtar and is related to SB Research, Inc. Readers should assume that Sands Brothers & Co., Ltd. and/or its related companies have and continues to offer investment banking services to Epixtar Corp. Within the next three months Sands Brothers and SB Research, Inc will seek to be compensated for its services. Sands Brothers makes a market in the shares of EPXR. Prices are as of the close, August 4, 2003. Dow Jones 30: 9,186. The information set forth in this background report was obtained from primary and secondary sources, which SB Research, Inc. believes to be reliable, but we do not guarantee its accuracy or completeness. None of the information contained herein nor any opinions expressed constitutes a solicitation by us for the purchase or sale of any securities, but is provided for the information of our clients and customers and other interested parties. Officers, employees and other affiliates of SB Research, Inc. or members of their families, may hold positions in these securities and may make purchase and/or sales from time to time in the open market or otherwise. Securities recommended by SB Research, Inc. (i) are not insured by the Federal Deposit Insurance Corporation; (ii) are subject to investment risks, including the possible loss of the principal amount invested. All opinions and estimates constitute SB Research’s judgment as of the date of the report and are subject to change without notice. This report may not be duplicated without the express permission of SB Research, Inc. Analyst Certification: Each SB Research Analyst named on the front page of this report hereby certifies that (i) the recommendations and opinions expressed herein accurately reflect such Analyst’s personal views about the company and securities that are the subject of this report and all other companies and securities mentioned in this report that are covered by such Analyst, and (ii) no part of the Analyst’s compensation was, is, or will be directly or indirectly, related to the specific recommendations or views expressed by such Analyst in this report. 16