-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Gokc5dQNV1uuEgKzxfMw3rGTHXx7s1EEm5Zzbszc8SuoN8SyPPWJCYY/9NACnAk5 kstRa5U+7DAbJFcFP72ShQ== 0001125282-04-002850.txt : 20040618 0001125282-04-002850.hdr.sgml : 20040618 20040618171808 ACCESSION NUMBER: 0001125282-04-002850 CONFORMED SUBMISSION TYPE: SB-2/A PUBLIC DOCUMENT COUNT: 12 FILED AS OF DATE: 20040618 FILER: COMPANY DATA: COMPANY CONFORMED NAME: EPIXTAR CORP CENTRAL INDEX KEY: 0001099730 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-COMPUTER PROCESSING & DATA PREPARATION [7374] IRS NUMBER: 650722193 STATE OF INCORPORATION: FL FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: SB-2/A SEC ACT: 1933 Act SEC FILE NUMBER: 333-106677 FILM NUMBER: 04871231 BUSINESS ADDRESS: STREET 1: 11900 BISCAYNE BLVD SUITE 262 CITY: MIAMI STATE: FL ZIP: 33181 BUSINESS PHONE: 3055038600 MAIL ADDRESS: STREET 1: 11900 BISCAYNE BLVD SUITE 262 CITY: MIAMI STATE: FL ZIP: 33181 FORMER COMPANY: FORMER CONFORMED NAME: GLOBAL ASSET HOLDINGS INC DATE OF NAME CHANGE: 19991124 SB-2/A 1 b332632_sb2a.txt SB-2/A Filed with the Securities & Exchange Commission on June 18, 2004 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 Amendment No. 1 to Form SB 2 filed on FORM S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 3,491,576(1) EPIXTAR CORP. (Name of issuer in its charter) FL 7385 65-0722193 -- ---- ---------- (State or jurisdiction of incorporation (Primary Standard Industrial (I.R.S. Employer or organization) Classification Code Number) Identification No.) 11900 Biscayne Boulevard, Miami, Florida 33181 (305) 503-8600 (Address and telephone number of principal executive offices) DAVID SROUR Chief Executive Officer 11900 Biscayne Boulevard, Miami, Florida 33181 (305) 503-8600 (Name, address, including zip code, and telephone number, including area code, of agent for service) Copies to: MICHAEL D. DIGIOVANNA, ESQUIRE 212 Carnegie Center Suite 206 Princeton, New Jersey 08540 (609)919 636 Approximate date of proposed sale to the public AS SOON AS PRACTICABLE AFTER THIS REGISTRATION STATEMENT BECOMES EFFECTIVE. - ------------------ If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, other than securities offered only in connection with dividend or interest reinvestment plans, check the following box [X]. If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] If delivery of the prospectus is expected to be made pursuant to Rule 434, check the following box. [ ] CALCULATION OF REGISTRATION FEE
Title of each Proposed Proposed class of securities Amount to maximum offering Maximum aggregate Amount of to be registered be registered price per unit offering price registration fee ---------------- ------------- -------------- -------------- ---------------- Common Stock par value $. 001 1,197,989 $4.65 $ 5,570,649(1) $ 450.67(1) Common Stock par value $.001 1,213,352 (2) 4.14 $ 5,023,277 $ 592.24 Common Stock par value $.001 3,655,596 3.25 $11,880,687 $1,327.07 Total 5,966,937
(1) Estimated solely for the purpose of calculating the registration fee pursuant to Rule 457(c) based upon the average of the bid and asked prices of the common stock on the OTC Bulletin Board on June 26, 2003. (2) Represents additional shares to be registered subsequent to the original SB-2 filed by the Company subsequent to June 30, 2003 based upon the average of the bid and asked prices of the common stock on the OTC Bulletin Board on May 10, 2004. (3) Represents additional shares to be registered subsequent to the original SB-2 filed by the Company subsequent to May 14, 2004) based upon the average of the bid and asked prices of the common stock on the OTC Bulletin Board on June 14, 2004. Pursuant to Rule 416 of the Act, this registration statement also covers such indeterminate additional shares of common stock as may become issuable as a result of stock splits, stock dividends or other similar events. The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the Registration Statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine. EXPLANATORY NOTE This registration statement contains two prospectuses: one relating to the resale offering by selling stockolders of 2,475,376 shares of the Company's common stock, par value $.001, per share and another prospectus relating to the offering of 3,491,576 shares of common stock held by a selling stockholder who may wish to sell common stock pursuant to securities acquired in the Company's recent note financings. The later prospectus relating to the the note financings is referred to as the note financing prospectus. Following the prospectus are substitute pages of the note financing prospectus, including alternate pages front outside and back cover pages, an alternative "The Offering" section of the "Prospectus summary" and section entitled "Selling Stockholders." Each of the alternate pages for the selling stockholder prospectus is labeled "Alternate page for note financing prospectus." All other sections of the prospectus are to be used in the note financing prospectus. In addition, cross-references in the prospectus will be adjusted in the selling stockholder prospectus to refer to the appropriate sections. PROSPECTUS 2,475,376 Shares of Common Stock EPIXTAR CORP Stockholder of Epixtar Corp. named under the caption "Selling Stockholder" may offer and sell up to 2,475,376 Shares of our common stock. Of the shares offered hereby 2,204,241 will be issued in the future pursuant to warrants and convertible preferred stock presently outstanding. We will not receive any of the proceeds from the sale of shares by the selling stockholders. Concurrently with this offering other stockholders are selling 3,591,576(1) shares subject to outstanding notes and warrants. Our common stock is quoted on the OTC Bulletin Board under the symbol EPXR. On June 14, 2004, the price of the Common Stock was $3.30 per share. NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE ADEQUACY OR ACCURACY OF THE PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. Our common stock being offered by this prospectus involves a high degree of risk. You should read the "Risk Factors" section beginning on page 6 before you decide to purchase any common stock. The date of this Prospectus is The information in this prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell securities, and we are not soliciting offers to buy these securities, in any state where the offer or sale is not permitted. TABLE OF CONTENTS Page ---- Prospectus Summary......................................................... Risk Factors............................................................... Forward Looking Information................................................ Use of Proceeds............................................................ Capitalization............................................................. Market Information......................................................... SelectedFinancial Information.............................................. Management Discussion and Analysis of Financial Condition and Results of Operations.................................................... Our Business............................................................... Property................................................................... Legal Proceedings.......................................................... Directors, Executive Officers.............................................. Security Ownership......................................................... Certain Relationships and Related Transactions............................. Plan of Distribution....................................................... Selling Stockholder........................................................ Description of Securities.................................................. Legal Matters.............................................................. Experts.................................................................... Available Information...................................................... Financial Statements.......................................................F- You should rely only on the information contained in this document. We have not authorized anyone to provide you with information that is different. This document may only be used where it is legal to sell these securities. The information in this document may only be accurate on the date of this document. 1 Prospectus Summary This summary highlights certain information contained elsewhere in this prospectus. You should read the following summary together with the more detailed information regarding Epixtar Corp. and its financial statements and the related notes appearing elsewhere in this prospectus. Our Business We are primarily engaged in a contact center business in the Philippines. Our contact centers perform business process outsourcing or BPO services for third parties. These services include marketing campaigns such as inbound services for customer care and inbound sales, and outbound services such as, data collection and customer acquisition for clients. From July 2001 to the present substantially all our revenue has been derived from subsidiaries acting as an internet service provider or ISP to small businesses through third party dial up facilities. These services were marketed through independent contact centers that we supervised, many of which were overseas. As result of the trend to foreign outsourcing and our expertise in contact center operations, we decided in 2003 to change the focus of our business. As of June 15, 2004 we have 600 contact center seats in the Philippines. [We anticipate by December 31, 2004 we will be operating 2000 seats with additional seats in development.] For the immediate future we will continue to derive most of our revenue from the ISP business. We believe that contact center revenue will be our primary source of revenue beginning in the first quarter of 2005. Our business, especially, the ISP business is subject to extensive regulation relating primarily to telemarketing activity and alleged unauthorized billing. We were subject to a Federal Trade Commission injunction which for a period of time prevented us from billing and marketing our ISP services. In addition, we are subject to two preliminary injunctions restricting our activities in two states and four states have served us with investigative subpoena. In all cases the company vehemently denies any wrong doing and is working to bring each action to a successful conclusion. We have developed stringent standards to avoid regulatory actions and the current customer complaints relating to any proceeding reflect only a small percentage of our customers. While we believe we are in substantial compliance with the rules, for economic reasons we are In settlement discussions with respect to proceedings. Our principal place of business is located at 11900 Biscayne Boulevard, Miami, Florida 33181. Our general telephone number is (305) 503-8600. Epixtar Corp. is also referred to in this prospectus as "Epixtar," "we," "us," or "our." These references shall include us and our subsidiaries unless otherwise indicated by the context. 2 THE OFFERING Our Securities Securities Offered by the Selling Stockholders Common Stock 2,475,376 (1) Concurrent Offering Outstanding before the Offering. Common Stock: 11,158,338 (3) and concurrent offering Preferred Stock: 22,010 Outstanding after the Offering Common Stock 16,758,465 (4) And concurrent offering Preferred Stock - none - -------------------------------------------------------------------------------- (1) Includes 2,204,241 shares of Common Stock not presently outstanding but issuable upon conversion of preferred stock or conversion of notes and exercise of warrants held by the selling stockholders. The amount also includes 190,000 shares reserved for issuance upon conversion of accrued dividends and interest. Depending upon the time of conversion a portion of these shares may not be issued. (2) The concurrent offering consists of shares of common stock subject to convertible notes and warrants issued in 2004 as well as shares which may be issued upon conversion of accrued interest and other contingencies. (3) Exclusive of shares subject to convertible securities, options, and warrants including shares offered by the selling stockholders. (4) Assumes conversion of all convertible securities and exercise of all warrants owned by selling stockholders in offering and concurrent offering. 3 Plan of distribution Sales of the shares may be made by selling stockholder in the open market or in privately negotiated transactions. Use of proceeds We will not receive any proceeds from the sale of shares owned by the selling stockholder but may receive proceeds upon exercise of the warrants which will be utilized for working capital. 4 Summary Financial Information The following summary financial information is qualified by reference to, and should be read in conjunction with, "Management's Discussion and Analysis of Financial Condition and Results of Operations" included elsewhere in this Prospectus. The financial information set forth below is audited with respect to the annual periods ended December 31, 2003 and December 31, 2002. The financial information for the year ended December 31, 2002 are derived from restated financial statements. See note 3 to the 2002 year-end audited Financial Statements. 5 RISK FACTORS You should carefully consider the following risk factors and all other information contained in this prospectus before investing in our common stock. We believe this section addresses all material risks specific to us. Investing in our common stock involves a high degree of risk. Any of the following risks could adversely affect our business, financial condition and results of operations and could result in a complete loss of your investment. We have experienced losses from operations in prior periods and may have losses in the future. We had no operations prior to November 2000 and increased losses in 2001 and 2002 including a loss of $11,944,922 for 2002. Although we had net income of $4,379,160 in 2003, we sustained a loss of $ 859,555 for the three month period ended March 31 2004. There is no assurance that we will operate profitably in the future. The establishment of our contact center business may result in losses or reduction of income in the immediate future. We have only recently commenced our contact center business and no have significant operating history. Therefore our business and future prospects are difficult to evaluate. You should consider the challenges, risks and uncertainties frequently encountered by early-stage companies using new and unproven business models in rapidly evolving markets. These include significant start-up expenses, obtaining and performing contracts with clients, hiring and retaining qualified personnel establishing a reputation in the industry and acquiring, developing and managing contact centers, managing growth , and obtaining additional capital if required. Moreover as we transition to our new business we will devote fewer resources to our continuing ISP business. This will result in a reduction in revenue from our ISP business which may not be immediately replaced by revenues from our contact center business. There is no assurance we will be able to enter into substantial arrangements with clients for our contact center business or that we can develop call centers on terms favorable to us or at all. Moreover, even if we enter into any such arrangements or succeed in the development or acquisitions of call center assets, there is no assurance that such arrangements with clients or any development or acquisitions of contact center assets will be profitable. Moreover the transition to our new business may result in loss of ISP revenues which we may not be able to replace timely if at all. 6 We may in future require additional capital for our contact center business and the failure to obtain additional capital may result in our inability to implement future business plan on a timely basis or at all. Our new contact center business requires additional personnel, the acquisition and construction of contact centers for telemarketing and other operations, as well as the purchase of additional equipment. We believe we have sufficient capital to implement our initial plans for this business. We, however, may need additional financing in the future for unforeseen factors, including: o The timing of agreements for our offshore BPO services; o the need to enhance our operating infrastructure or to upgrade upon technological change; o increasing costs, particularly in the Philippines; o the existence of opportunities to acquire businesses or technologies, or opportunities for expansion or introduce new services; and o increased competition and competitive pressures. If our capital resources are insufficient to satisfy our liquidity requirements, we may seek to sell additional equity or debt securities or obtain other debt financing. The sale of additional equity securities or convertible debt securities would result in additional dilution to our stockholders. Additional debt would result in increased expenses and could result in covenants that restrict our operations. We may be unable to secure financing in sufficient amounts or on terms acceptable to us, if at all, in which case we may not have the funds necessary to finance our ongoing capital requirements or execute our business strategy. A reversal of industry trends toward offshore outsourcing due to negative public reaction in the United States and recently proposed legislation may adversely affect demand for our services. Our business depends in large part on U.S. industry trends towards outsourcing business processes offshore. The trend to outsource business processes may not continue and could reverse. Offshore outsourcing has become a politically sensitive topic in the United States, particularly in the light of the upcoming Presidential election. Recently, many organizations and public figures have publicly expressed concerns about a perceived association between offshore outsourcing providers and the loss of jobs in the United States. In addition, there has been recent publicity about the negative experience of certain companies that use offshore outsourcing current or prospective clients may elect to perform such services themselves or may be discouraged from transferring these services to offshore providers to avoid any negative perception that may be associated with using an offshore provider. Any slowdown or reversal of existing industry trends would harm our ability to compete effectively with competitors that operate out of facilities located in the United States. 7 A variety of federal and state legislation has been proposed that, if enacted, could restrict or discourage U.S. companies from outsourcing their services to companies outside the United States. For example, legislation has been proposed that would require offshore providers to identify where they are located. In addition, it is possible that legislation could be adopted that would restrict U.S. private sector companies that have federal or state government contracts from outsourcing their services to offshore service providers. Any expansion of existing laws or the enactment of new legislation restricting offshore outsourcing may adversely impact our ability to do business with U.S. clients, particularly if these changes are widespread. Our operating results may fluctuate significantly and could cause the market price of our common stock to fall rapidly. Our revenues and operating results are difficult to predict and may fluctuate significantly from quarter to quarter due to a number of factors, including: o the addition or loss of a clients, including major clients, and change in volume of services provided to our major clients; o The introduction of new or enhanced services; o long sales cycles and fluctuations in sales cycles; o changes in our pricing policies or those of our competitors, as well as increased price competition in general; We are subject to risks arising from our operations in the Philippines. Substantially all of our contact center operations will be in the Philippines. We are exposed to a number of significant risks associated with our operations in the Philippines, including the following: o Wages for employees in the Philippines are increasing at a faster rate than for our U.S. employees, which could result in increased costs to employ our outsourcing center professionals. o We are faced with competition in the Philippines for outsourcing center professionals, and we expect this competition to increase as additional BPO companies enter the market and expand their operations. In particular, there may be limited availability of qualified middle and upper management candidates. This could increase our costs and turnover rates. o The Philippines continues to experience low growth in its gross domestic product, significant inflation, currency declines and shortages of foreign exchange. These conditions could create economic instability that could harm businesses operating in the Philippines. o We have benefited from an excess of supply over demand for college graduates in the Philippines. If this favorable imbalance changes, it could affect the availability or cost of qualified professionals, who are critical to our performance. 8 o All of our revenues are denominated in U.S. dollars, and a substantial portion of our costs are incurred and paid in Philippine pesos, and we are therefore exposed to the risk of an increase in the value of the Philippine peso relative to the U.S. dollar, which would increase our expenses. We do not currently engage in any transactions as a hedge against risk of loss due to foreign currency fluctuations. o We are exposed to the risk of rental and other cost increases due to inflation in the Philippines, which has historically been at a much higher rate than in the United States. o The Philippines periodically experiences civil unrest and terrorism and U.S. companies in particular may experience greater risk. We are not insured against terrorism risks. o A favorable business climate in the Philippines could change the result in adverse changes to tax, regulatory and other legal requirements which could increase our operating costs, increase our exposure to legal and business risks and make it more difficult. o We have benefited from significant government assistance in the Philippines, including the grant of income tax holidays and preferential tax treatments under our registrations with the Philippine Board of Investments, or BOI, and Philippine Economic Zone Authority, or PEZA, and changes to the country's educational curriculum in order to attract foreign investment in specified sectors including the outsourcing industry. Despite these benefits, the Philippine national and local governments could alter one or more of these beneficial policies and the Philippine legislature could amend the laws granting preferential tax treatment. The elimination of any of the benefits realized by us from our Philippine operations, including tax incentives, could result in increased operating expenses and impair our competitive advantages over BPO companies based outside of the Philippines. We anticipate that we will encounter a long sales and implementation cycle requiring significant resource commitments by our clients, which they may be unwilling or unable to make. The implementation of our service involves significant resource commitments by us and our clients. We expend substantial time and money educating potential clients as to the value of our services and assessing the feasibility of integrating our systems and processes with theirs. The potential client's senior management and a significant number of client personnel must evaluate the proposal in various functional areas, each having specific and often conflicting requirements. Despite the significant expenditures of funds and management resources, the potential client may not engage our services. Our sales cycle generally ranges up to six to twelve months or longer. Failure to close may have a negative impact on revenue and income as these resources could otherwise be used for a paying client. The following factors enter into a client's decision. o Our clients' alternatives to our services, including their willingness to replace their internal solutions or existing vendors; o Our clients' budgetary constraints, and the timing of our clients' budget cycles and approval processes; 9 o Our clients' willingness to expend the time and resources necessary to integrate their systems with our systems and network; and o The timing and expiration of our clients' current outsourcing agreements for similar services. When we are engaged by a client after the sales process, it takes from four to six weeks to integrate the client's systems with ours, and up to three months thereafter to ramp-up our services to the client's requirements. We may not be able to manage our growth effectively. Since we commenced our contact center business we have expanded rapidly and intend to maintain our growth focus. Continued growth could place a strain on our management, operations and financial resources. Our infrastructure, facilities and personnel may not be adequate to support our future operation or to adapt effectively to future growth. As a result, we may be unable to manage our growth effectively, in which case our operating costs may increase at a faster rate than the growth in our revenues, our margins may decline and we may incur losses. In order to manage our growth successfully, we must o Maintain the hiring, training and management necessary to ensure the quality and responsiveness of our services; o expand and enhance our administrative and technical infrastructure, facilities and capacities to accommodate increased call volume and other customer management demands; and o Continue to improve our management, financial and information systems and controls. We may experience significant employee turnover rates in the future and we may be unable to hire and retain enough sufficiently trained employees to support our operations. The BPO industry is very labor intensive and our success depends on our ability to attract, hire and retain qualified employees. We compete for qualified personnel with companies in our industry and in other industries and this competition is increasing in the Philippines as the BPO industry expands. Our growth requires that we continually hire and train new personnel. The BPO industry, including the customer management services industry, has traditionally experienced high employee turnover. A significant increase in the turnover rate among our employees would increase our recruiting and training costs and decrease operating efficiency and productivity, and could lead to a decline in demand for our services. If this were to occur, we would be unable to service our clients effectively and this would reduce our ability to continue our growth and operate profitably. We may be unable to continue to recruit, hire, train and retain a sufficient labor force of qualified employees to execute our growth strategy or meet the needs of our business. 10 Our operations could suffer from telecommunications or technology downtime, disruptions or increased costs. We are highly dependent on our computer and telecommunications equipment and software systems. In the normal course of our business, we must record and process significant amounts of data quickly and accurately to access, maintain and expand the databases we use for our services. We are also dependent on continuous availability of voice and electronic communication with customers. If we experience interruptions of our telecommunications network with our clients, we may experience data loss or a reduction in revenues. These disruptions could be the result of errors by our vendors, clients or third parties, electronic or physical attacks by persons seeking to disrupt our operations, or the operations of our vendors, clients or others. For example, we currently depend on two significant vendors for facility storage and related maintenance of our main technology equipment and data at our U.S. data centers. Any failure of these vendors to perform these services could result in business disruptions and impede our ability to provide services to our clients. A significant interruption of service could have a negative impact on our reputation and could lead our present and potential clients not to use our services. The temporary or permanent loss of equipment or systems through casualty or operating malfunction could reduce our revenues and harm our business. We could cause disruptions to our clients' business from inadequate service. Our insurance coverage may be inadequate. Failures to meet service requirements of a client could disrupt the client's business and result in a reduction in revenues or an increase in charges or a claim for substantial damages against us. For example, some of our agreements may have standards for service that, if not met by us, may result in lower payments to us. In addition, because many of our projects are business-critical projects for our clients, a failure or inability to meet a client's expectations could seriously damage our reputation and affect our ability to attract new business. To the extent that our contracts contain limitations on liability, such contracts may be unenforceable or otherwise may not protect us from liability for damages. While we maintain general liability insurance coverage, including coverage for errors and omissions, this coverage may be inadequate to cover one or more large claims, and our insurer may deny cover. Unauthorized disclosure of sensitive or confidential client and customer data, whether through breach of our computer systems or otherwise, could expose us to protracted and costly litigation and cause us to lose clients. We may be required to collect and store sensitive data in connection with our services, including names, addresses, social security numbers, credit card account numbers, checking and savings account numbers and payment history records, such as account closures and returned checks. If any person, including any of our employees, penetrates our network security or otherwise misappropriates sensitive data, we could be subject to liability for breaching contractual confidentiality provisions or privacy laws. Penetration of the network security of our data centers could have a negative impact on our reputation and could lead our present and potential clients to choose other service providers. 11 We may make acquisitions that prove unsuccessful or divert our resources. We intend to consider acquisitions of other companies in our industry that could complement our business, including the acquisition of BPO companies with expertise in other industries and clients that we do not currently serve. We have little experience in completing acquisitions of other businesses, and we may be unable to successfully complete an acquisition. If we acquire other businesses, we may be unable to successfully integrate these businesses with our own and maintain our standards, controls and policies. Acquisitions may place additional constraints on our resources by diverting the attention of our management from existing operations. Through acquisitions, we may enter markets in which we have little or no experience. Any acquisition may result in a potentially dilutive issuance of equity securities, the incurrence of debt and amortization of expenses related to intangible assets, all of which could lower our margins and harm our business. We utilize a third-party vendor for services related to strategic planning and implementation of our contact center business. Through our principal stockholder, of which Martin Miller, our Chairman of the Board, is a principal owner, we have retained an independent consulting firm to assist us primarily in establishing a new direction for our business and its personnel. The consulting firm assists us in identifying international opportunities, including pinpointing locations for call centers, negotiating transactions for our new business, implementing our new strategy and general supervision. Our clients may adopt technologies that decrease the demand for our services, which could reduce our revenues and seriously harm our business. We target clients with a high need for our customer management services However, over time, our potential clients may adopt new technologies that decrease the need for live customer interaction, such as interactive voice response, web-based self-help and other technologies used to automate interactions with customers. The adoption of such technologies could reduce the demand for our services, pressure our pricing, cause a reduction in our revenues and harm our business. Our independent auditors report with respect to our 2003 consolidated financial statements. 12 Our independent auditors report have not expressed a going concern opinion with respect to our 2003 consolidated financial statements includes an emphasis on Note 3 to the financial statements for a description of profitability and liquidity issues. We cannot give assurance that any possible adverse consequences will not continue as a result of the removal of such qualification from our 2003 financial statements. We may be required to write down Goodwill which will result in the recognition of substantial expenses. Our assets include $3,360,272 of goodwill. This reflects the unamortized portion of the difference between the value of the consideration paid to acquire the minority portion of National Online and the book value of the assets of National Online at the time of acquisition. Under present accounting rules this asset may be written down, in whole or in part, if it is unlikely that the full amount of excess value will be realized. We have not written down any amount of this goodwill in 2003 but if our ISP revenues continue to decline we may be required to do so in 2004. Any write down in the future will be treated as an expense and reduce our income. A proceeding instituted by the Federal Trade Commission Relating to Our ISP business has adversely impacted our business and financial position and has not been finally settled and could have further impact on revenues and income. On October 30, 2003, the Federal Trade Commission or FTC instituted an action in federal district court against us and certain of our subsidiaries. The action sought to enjoin alleged failure by certain of our ISP subsidiaries to comply with regulations relating to the conversion of a trial customer to a paying customer. We market our ISP services by offering a trial period followed by pay periods. In connection with the action the FTC obtained an ex parte temporary restraining order, a freeze on our assets, and the appointment of a temporary receiver. This ex-parte order prevented us from marketing and billing our ISP services and deprived us of substantial assets. We therefore experienced significant business disruption, incurred substantial expenses and experienced a reduction of our working capital. While we believed we complied with the law and the proceeding was unwarranted, on November 21, 2003, we entered into a stipulated preliminary injunction, without any admission or finding of wrongdoing. As a result, we were able to resume business subject to procedures set forth in the stipulation (substantially all of which we had already followed) and the oversight of a monitor. The appointment of the receiver was terminated and replaced by a monitor and the asset freeze was lifted except that a portion of our assets were held in escrow against future customer refunds. It is impossible, at this time, to determine the full impact of this action but the order has resulted in a reduction of our revenue and income in the fourth quarter of 2003 and first quarter of 2004. The reduction of revenues and asset freeze and escrow (even though a majority of the funds were released) in turn resulted in working capital issues. This caused us to initiate cost cutting measures and delayed the timetable for implementing our new business direction. We are presently negotiating the terms of a final permanent injunction. We cannot predict the terms of the final order or when the terms will be finalized. We recently obtained financing which alleviated our working capital situation and enabled us to proceed with the timely development of contact centers in the Philippines. 13 Government regulation and customer complaints relating to our ISP business entail costly compliance that have lead to regulatory proceedings that are expensive to defend and may result in adverse judgments and detrimental publicity. Our subsidiaries are subject to the oversight of various governmental agencies, including the Federal Trade Commission and similar state agencies. These agencies and other federal and state agencies regulate our marketing activities. We believe we are in material compliance with all these regulations. The most significant of these regulations relates to free to pay conversion rules designed to prevent "cramming" or the unauthorized billing of a customer. To guard against violation of these regulations, we, at substantial expense, have imposed strict controls on our in house and independent contact center sales representatives. Nevertheless, proceedings have been commenced against us. We are subject to a Stipulated Preliminary Injunction entered into in a proceeding instituted by the Federal Trade Commission to prohibit alleged violations by us of the free to pay conversion rules. While we denied all liability we entered into the stipulation to resume business after a temporary restraining order. See Risk Factor "A proceeding instituted by the Federal Trade Commission has adversely impacted our business and financial position" for a discussion of the consequences of this proceeding. During 2003, Missouri and North Carolina sought a permanent injunction to bar us from violating the cramming rules. In both states, we voluntarily entered into orders barring us from cramming. We did so since we do not engage in cramming practices and neither state is a source of significant revenue. We intend to contest the imposition of a permanent injunction in these states. We are also subject to investigatory subpoena inquiries in Florida, Texas, Kansas, and Minnesota and are cooperating fully in each case. We have not been affected by the federal or state "do not call" regulations because our ISP subsidiaries only call business telephone numbers and these types of numbers are not subject to these regulations. We cannot predict the effect of these rules on our outsourcing business. In the future we may experience substantial adverse consequences on our ISP operations if we were found to have materially violated any regulations. In that event we may be fined a substantial amount, and may be required to cease or modify our business plans or otherwise limit operations. Moreover, we could also be adversely affected if we are unable to meet any material future change in regulations. See "Legal Proceedings." Our ISP business depends upon third-party vendors for billing and collection of our accounts receivable. The customers of our ISP subsidiaries are billed through local exchange carriers or LECS. Our subsidiaries rely on third party clearing agents or billing houses for collection of our receivables from the LEC. We have material arrangements with two billing houses, ACI Billing Services, Inc., eBillit, Inc. a.k.a Payment One . While we believe there are potential replacements for our present billing houses, there is no assurance we will be able to find adequate replacements upon suitable terms. Because LECs have a monopoly, or near monopoly, on phone service in an area, the loss of a LEC may not be replaced. 14 In early 2003, a LEC and billing agent limited or declined any dealings with certain of our ISP subsidiaries because of the number of complaints received. SBC, a LEC, refused to deal with us directly. As a result our market of potential customers was reduced because for the most part we could not solicit in, the geographic area operated by this LEC. We were able in 2003, however, to obtain sufficient substitute customers in other areas to maintain revenue growth. The loss of an additional LEC could have substantial adverse consequences on our revenues and profitability. In addition our receivables collected by clearing agents are not segregated, we could lose these funds upon any bankruptcy of a clearing agent. If we do not successfully implement our contact center business, we must increase our ISP customer base or face possible future losses and liquidity problems. While we intend to continue to operate our ISP business we will concentrate our resources on our new business. As a result, there is significant likelihood that we may not be able to grow or maintain our ISP business. If we do not successfully implement our new business, we will be dependent on our existing ISP business which has declined. Due to attrition of customers in our ISP business, we have constantly sought to retain our existing customer base and to find new customers through telemarketing efforts and with the introduction of new products. If our new business is not successful and we do not replace lost ISP customers our future revenues and income may be reduced. We serve markets that are highly competitive and we may be unable to compete with businesses that have greater resources than we do. We face significant competition for outsourced business process services and expect that competition will increase. We believe that, in addition to prices, the principal competitive factors in our markets are service quality, sales and marketing skills, the ability to develop customized solutions and technological and industry expertise. While numerous companies provide a range of outsourced business process services, we believe our principal competitors include our clients' own in-house customer service groups, including, in some cases, in-house groups operating offshore, offshore outsourcing companies and U.S.-based outsourcing companies. The trend toward offshore outsourcing, international expansion by foreign and domestic competitors and continuing technological changes will result in new and different competitors entering our markets. These competitors may include entrants from the communications, software and data networking industries or entrants in geographic locations with lower costs than those in which we operate. We have existing competitors for our BPO business, and may in the future have new competitors, with greater financial, personnel and other resources, longer operating histories, more technological expertise, more recognizable names and more established relationships in industries that we currently serve or may serve in the future. Increased competition, our inability to compete successfully against current or future competitors, pricing pressures or loss of market share could result in increased costs and reduced operating margins, which could harm our business, operating results, financial condition and future prospects. 15 Many companies offer internet provider services and other products and services similar to those offered by us. Many of these firms are well established, have reputations for success and have significantly greater financial, marketing, distribution, personnel, and other resources than us. Further, there can be no assurance that we will not experience price competition, and that such competition may not adversely affect our financial position and results of operations adversely affect our revenues and profitability. We have entered into substantial transactions with our Principal Stockholders. Trans Voice L.L.C, the owner of over 50% of our common stock, has entered into an agreement as of April 2003 to obtain a third party to provide strategic planning supervision, and other services to us primarily for our new business. Martin Miller, our Chairman of the board, is the beneficial owner of fifty percent of this entity. Amounts paid to Trans Voice are a pass-through and are meant to reimburse Trans Voice for payments it makes or is obligated to make to third party vendors under that agreement. We also are a party to an Amended and Restated Payment Agreement with Trans Voice Investments, Inc. whereby we pay Trans Voice, L.L.C., as assignee of Trans Voice Investments, Inc., $150,000 per month and pay Trans Voice Investments, Inc. $1.00 for every customer over 100,000. This agreement was originally entered into in consideration for services rendered to us by Trans Voice Investments, Inc., the parent company of Trans Voice L.L.C. This agreement and subsequent modifications were entered into when Trans Voice L.L.C was not one of our principal shareholders. However, one of the principal holders was an officer prior to the execution of the original agreement. While we believe the transaction referred to was fair to us they were not necessarily negotiated at arms length. Future transactions with principal stockholder officer or director will need to be approved by the majority of our independent directors. Stock ownership of our principal stockholders could delay or prevent stockholder actions. Messrs. Martin Miller and Stanley Myatt beneficially own over 50% of our outstanding common stock and may be able to control decisions of our stockholders. Their ownership may also have the effect of delaying, deferring or preventing a change in our control and make transactions that could give our public, minority stockholders the opportunity to realize a premium over the then-prevailing market price for shares of common stock more difficult or impossible. We have a substantial number of shares that may become freely tradable and could therefore result in a reduced market price. As of March 26, 2004, we had an aggregate of 11,158,338 shares of our common stock issued and outstanding, of which approximately 7,108,338 shares are "restricted securities". These shares may be sold only in compliance with Rule 144 under the Securities Act of 1933, as amended, or other exemptions from registration requirements of the Securities Act. Rule 144 provides, in essence, that a person holding restricted securities for a period of one year after payment therefor may sell, in brokers' transactions or to market makers, an amount not exceeding 1% of the outstanding class of securities being sold, or the average weekly reported volume of trading of the class of securities being sold over a four-week period, whichever is greater, during any three-month period. Persons who are not our affiliates and who had held their restricted securities for at least two years are not subject to the volume or transaction limitations. Substantially all of our presently issued shares will be capable of sale pursuant to Rule 144 subject to the foregoing limitations. In addition we have a substantial number of warrants and convertible securities. Over 6,000,000 of these shares will be included in an amended registration statement to be filed with the Securities and Exchange Commission. Over 7,800,000 in restricted shares outstanding or subject to preferred stock are 144 eligible or will be by July 2002. The sale of a significant number of these shares in the public market may adversely affect prevailing market prices of our securities. 16 If our shares are not listed on a stock exchange or Nasdaq, the trading of our securities may be subject to restriction. We have applied to have our shares of Common Stock listed on the American Stock Exchange. If our application is denied, our stock will continue to be traded on the OTC Bulletin Board. Trading volume of OTC Bulletin Board stocks have been historically lower and more volatile than stocks traded on an exchange or Nasdaq Stock Market. In addition we may be subject to rules of the Securities and Exchange Commission that impose additional requirements on broker-dealers when selling penny stocks to persons other than established customers and accredited investors. At the moment we do not believe our securities are subject to these rules because our average revenues during the last three years exceeded $6,000,000. In general, an accredited investor is a person with assets in excess of $1,000,000 or annual income exceeding $200,000 individually, or $300,000 together with his or her spouse. The relevant Securities and Exchange Commission regulations generally define penny stocks to include any equity security not traded on an exchange or Nasdaq with a market price (as defined in the regulations) of less than $5 per share. Under the penny stock regulations, a broker-dealer must make a special suitability determination as to the purchaser and must have the purchaser's prior written consent to the transaction. Prior to any transaction in a penny stock covered by these rules, a broker-dealer must deliver a disclosure schedule about the penny stock market prepared by the Securities and Exchange Commission. Broker-dealers must also make disclosure concerning commissions payable to both the broker-dealer and any registered representative and provide current quotations for the securities. Finally, broker-dealers are required to send monthly statements disclosing recent price information for the penny stock held in an account and information on the limited market in penny stocks. If our common stock were to be subject to penny stock rules, these rules may discourage broker-dealers from effecting transactions in our common stock or affect their ability to sell our securities. As a result, purchasers and current holders of our securities could find it. We do not intend to or can we pay dividends on our common stock. We have not paid any dividends on our common stock. Our notes prohibit the payment of dividend. There are no plans to declare dividends in the immediate future but we may, depending upon permission of the noteholders, from time to time, declare dividends in stock or cash. Our Series A Convertible Preferred Stock provides for 8% cumulative dividends to be paid annually. 17 Our stock price, like that of many small companies, has been and may continue to be volatile. We expect that the market price of our common stock will fluctuate as a result of variations in our quarterly operating results and other factors beyond our control. These fluctuations may be exaggerated if the trading volume of our common stock is low. 18 FORWARD-LOOKING STATEMENTS Certain statements contained herein may constitute "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward looking statements are subject to various known and unknown risks and uncertainties and We caution you that any forward-looking information provided by or on behalf of the us is not a guarantee of future performance. Our actual results could differ from those anticipated by such forward-looking statements due to a number of factors, some of which are beyond our control, including (i) the timing of significant orders for our services, (ii) changes in applicable accounting principles, (iii) difficulties or delays in implementing our service offerings, (iv) failure to achieve sales, marketing and other objectives, (v) construction delays of new call centers, (vi) delays in our ability to develop new products and services and market acceptance of new products and services, (vii) rapid technological change, (viii) loss of significant customers, (ix) risks inherent in conducting business abroad, (x) currency fluctuations, (xi) fluctuations in business conditions and the economy, (xii) our ability to attract and retain key management personnel, (xiii) the marketplace's acceptance of our service offerings, (xiv) our ability to continue the growth of its support service revenues through additional technical and customer service centers, (xv) our ability to expand our global presence through strategic alliances and selective acquisitions, (xvi) our ability to establish a competitive advantage through sophisticated technological capabilities, (xvii) the ultimate outcome of certain regulatory actions, and (xviii) our continued ability to attract and obtain adequate financing (xix) other risk factors listed from time to time in our registration statements and reports as filed with the Securities and Exchange Commission. All forward-looking statements which may be contained in this registration statement are made as of the date that such statements are originally published or made, and we undertake no obligation to update any such forward-looking statements. For those statements, we claim the protection of the safe harbor for forward-looking statements contained in Section 27A of the Securities Act, Section 21E of the Exchange Act, and the Private Securities Litigation Reform Act of 1995. USE OF PROCEEDS We will not receive any proceeds from the offering of the selling stockholders. If any of the warrants are exercised we may receive the exercise price and will utilize these proceeds for working capital. CAPITALIZATION The following table sets forth our capitalization as of March 31, 2004 19 o -on an actual basis; o -on a pro forma basis to give effect to a our recent financings and other transactions o -on a pro forma as adjusted basis to assume the exercise or conversion of all shares subject to notes and warrants held by selling shareholders. You should read the following table together with "Management's discussion and analysis of financial condition and results of operations" and our consolidated financial statements and the notes to those statements appearing elsewhere in this prospectus. ACTUAL Pro Forma Actual Pro forma As adjusted ( dollars in thousands) - ------------------------------------------------------- Cash and cash equivalents 1) --$ ----------- Long-term liabilities convertible preferred stock, $.001 par value: ------------- shares authorized: ------------ - -Series A--shares designated; sharesissued and outstanding actual ------------- Stockholders' equity (deficit): - -Common stock, $.001 par value: shares authorized shares issued and outstanding ( shares issued and outstanding, pro forma ; and 10,962,663 shares issued and outstanding, pro forma as adjusted) ------------- 20 - -Additional paid-in capital ------------- - -Accumulated deficit --- -) --------- - -Total stockholders equity-----) --------- Total capitalization --$ ----------- (1) For purposes of the table we treat as outstanding shares we were obligated to issue but for which no certificates were issued. (2) Does not include shares of common stock reserved for issuance upon the exercise of options and warrants and shares issuable upon conversion of our outstanding preferred shares and notes.; does not include shares issued subsequent to March31 2004. (3) Assumes all preferred shares and notes are converted and all warrants exercised. Reflects net proceeds of private placement for shares of preferred and notes converted and the purchase price to be paid upon exercise of warrant. NEED HELP FROM FINANCIAL SIDE cap table MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS MARKET INFORMATION Our Common Stock is presently quoted, under the symbol "EPXR," on the OTC Bulletin Board. Prior to January 2003, our symbol was "GAHI". In January 2003, the symbol was changed as a result of our name change. Set forth below are the high and low closing bid quotations for our common stock for each quarter of the last two full fiscal years and a portion of the current year, as reflected on the electronic bulletin board. The quotations listed below represent prices between dealers and do not include retail mark-up, markdown or commission, and there can be no assurance that they represent actual transactions. 21 Fiscal year 2004 Quarter High Low 1st 5.15 2.96 2nd (Through June 14, 2004) 5.29 3.20 Fiscal year 2003 1st $4.15 $1.75 2nd $8.85 $2.75 3rd $6.45 $3.55 4th $6.40 $2.75 Fiscal Year 2002 1st $3.50 $0.68 2nd $0.83 $0.29 3rd $0.31 $0.31 4th $1.95 $0.28 STOCKHOLDERS. As of March 26, 2004 there were approximately 62 holders of record of our common stock. Because a substantial portion of our shares are held by a depository company in nominee name, we believe the number of beneficial owners of the securities is substantially greater than 62. DIVIDENDS We have not paid any dividends on our common stock. Our notes prohibit the payment of dividends. There are no plans to declare dividends in the immediate future but we may, depending upon permission of the noteholders, from time to time, declare dividends in stock or cash. Our Series A Convertible Preferred Stock provides for 8% cumulative dividends to be paid annually. 22 SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA The following table presents selected historical consolidated financial data as of, and for the years ended, December 31, 1999, 2000, 2001, 2002 and 2003, which has been derived from our audited consolidated financial statements. Our consolidated financial statements as of, and for the years ended, December 31, 2002 and 2003 were audited by Rachlin Cohen & Holtz LLP and our consolidated financial statements as of, and for the years ended, December 31, 1999, 2000 and 2001 were audited by another auditor. You should read this information together with "Summary historical consolidated financial data," "Management's discussion and analysis of financial condition and results of operations," and our consolidated financial statements and related notes for the years ended December 31, 2001, 2002 and 2003, which are included elsewhere in this prospectus. Historical results are not necessarily indicative of the results to be expected in the future. Selected Consolidated Financial Data (unaudited)
Year Ended December 31, -------------------------------------------------------------------------------- 2003 2002 2001 2000 1999 -------------- -------------- -------------- -------------- -------------- Consolidated Statements of Operations Data: Revenues $ 36,404,803 $ 26,250,851 $ 1,189,723 $ 13,387 $ -- Income (Loss) from Continuing Operations 4,379,160 (11,901,604) (3,251,788) (281,072) (38,374) Gain (Loss) from Discontinued Operations -- (43,318) 267,190 -- -- -------------- -------------- -------------- -------------- -------------- Net Income (Loss) per Common Share - Diluted: Continuing operations $ 0.16 $ (1.13) $ (0.42) $ (0.07) $ (0.01) Discountinued operations -- -- 0.03 -- -- -------------- -------------- -------------- -------------- -------------- Net income (loss) $ 0.16 $ (1.13) $ (0.39) $ (0.07) $ (0.01) ============== ============== ============== ============== ==============
December 31, ----------------------------------------------------------------------------- 2003 2002 2001 2000 1999 ---------- ---------- ---------- ---------- ---------- Consolidated Balance Sheet Data: Working capital 2,954,188 (3,638,292) (3,495,570) (560,639) (7,775) Total assets 12,982,794 8,583,145 4,438,294 171,856 -- Current portion of long-term debt 121,513 483,786 2,649,000 285,000 -- Notes payable, long-term debt and common stock to be issued 2,671,953 2,353,151 52,726 22,212 30,599 Stockholders' equity (deficiency) 5,397,988 8,583,145 47,438 (321,112) (38,374)
23 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. Historical While we are primarily a contact center company, substantially all our revenue has been derived from our ISP operations. In March 2001, we acquired National Online Services, Inc. ("NOL"), which developed and marketed internet provider services ("ISP") for small businesses. The operations of NOL commenced during 2001. We continued and expanded the operations of NOL as well as other ISP subsidiaries operating similar businesses primarily with funds generated from operations, making considerable expenditures for staffing and infrastructure. . In the fourth quarter of 2003, we determined to concentrate our efforts on implementing the change in direction of our business. We have now focused our energies on our contact center business providing services for third parties using facilities we operate or will develop or acquire. Today, our contact center business represents a small percentage of our revenue, but this business represents a significant focus of management and capital. The effect of this transition on our revenues, income and capital requirements is discussed below. 24 ACCOUNTING ISSUES Restatement We have restated our previously issued financial statements for 2002 as follows: o Acquisition of Savon and a 80% interest in National Online have been restated to reflect the requirement of staff accounting bulletin No. 48 and record those acquisitions at historical cost. As a result the financial statements have been restated to remove all goodwill, goodwill amortization and impairment charges with respect to these transactions. That portion of the goodwill relating to the acquisition of a minority interest in NOL remained. o In 2002 we entered into an agreement to restructure certain debt to a stockholder. We have determined that the transaction should have been treated as the issuance of a new note with a loss on debt extinguishment which includes the value of warrants as of the date of grant. o We have recorded the new note resulting from the debt restructuring at fair value net of a discount. The foregoing restatement is described in further detail in Note 2 to the financial statements. Accounting Policies and Procedures On an on-going basis, management evaluates its estimates and judgments, including those related to revenue recognition, allowance for uncollectible amounts, impairments of intangible assets, recognition of deferred income tax items and stock based compensation, bad debts and intangible assets. Management bases its estimates and judgments on historical experience and on various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. Management believes the following critical accounting policies, among others, affect its more significant judgments and estimates used in the preparation of its consolidated financial statements. Revenue recognition Our revenues are derived primarily from our ISP business through fees for providing small businesses with Internet access, websites and e-mail addresses through reselling dial-up access. Customers are billed monthly, following a thirty day free trial, and the revenue is recorded over the period in which the services are provided. Deferred revenue represents the unearned, billed revenue at the end of an accounting period. We contract with external entities for billing and collection services. Those entities require certain holdbacks and reserves be maintained to allow for the possibility that amounts will not be collected, refunds will be made or adjustments to customer accounts will be allowed. These holdbacks and reserves are included in accounts receivable. We provide an allowance for lack of collectability of these amounts approximately equal to fifty percent of the amounts held or reserved. This allowance is estimated and adjusted quarterly based on historical experience. 25 Impairment of intangible assets In connection with the acquisition of a minority interest in National Online we recorded goodwill. SFAS No. 142 "Goodwill and Other Intangible Assets" requires that goodwill no longer be amortized, but rather be evaluated for possible impairment at least annually. Our policy calls for the assessment of any potential impairment whenever events or changes in circumstances indicate that the carrying value may not be recoverable or at least annually. If an evaluation of undiscounted cash flows indicates impairment, the asset is written down to its estimated fair value which is based on discounted cash flows. We did not recognize any impairment charges for goodwill in the years ended December 31, 2003 and 2002 or for the periods March 31, 2004 and 2003 Deferred income taxes Through December 31, 2003 we incurred significant net operating losses for income tax purposes of December 31, 2003 we had net operating loss carry forwards available of approximately $19 million. As a result of ownership changes which occurred in June 2002, our operating tax loss carry forwards are subject to certain limitations. In addition, tax laws require items to be included in our tax return at different times than those items are reflected in our financial statements some of these differences are permanent and some differences reverse over time. These timing differences, as well as the net operating loss carry forwards, create deferred tax assets and liabilities. Deferred tax assets generally represent items that can be used as a tax deduction in our tax return in future years. We establish valuation allowances for our deferred tax assets when we believe expected future taxable income to offset those deductions is not likely. Based on our historical earnings history, we have established a 100% valuation allowance for our net deferred tax assets. Stock based compensation Historically we have used stock options and warrants as a method of compensating employees, contractors and creditors for services provided. We account for options and warrants granted to nonemployees at fair value. We account for options granted to employees using the intrinsic value method. The intrinsic method measures the value of the option as the difference between the exercise price of the option and our stock price on the date of grant. Usually we do not recognize any compensation expense in connection with employee options as the exercise price is generally equal to the stock price on the date of grant. Under the fair value method we measure the option or warrant at the date of grant using the Black-Scholes valuation model. The model estimates the expected value of the option or warrant based on a number of assumptions, such as interest rates, our stock price, the expected life of the option or warrant and dividend yield. 26 POSSIBLE IMPACT OF CERTAIN EVENTS UPON RESULTS OF OPERATIONS AND LIQUIDITY Recent Federal Trade Commission Proceeding Relating to ISP Business On October 30, 2003, the Federal Trade Commission instituted an injunction action in federal district court against us and certain of our subsidiaries. The action sought to enjoin alleged failures by certain of our ISP subsidiaries to comply with regulations relating to the conversion of a trial customer to a paying customer. In connection with the action the Commission obtained an ex- parte temporary restraining order, a freeze on our assets, and the appointment of a temporary receiver. This ex-parte order prevented us from marketing and billing our ISP services and deprived us of substantial assets. We therefore experienced significant business disruption, incurred substantial expenses and experienced a reduction of our working capital. While we believed we complied with the law and the proceeding was unwarranted, on November 21, 2003 we entered into a stipulated preliminary injunction, without any admission or finding of wrongdoing. As a result, we were able to resume business subject to procedures set forth in the stipulation (substantially all of which we had already followed) and the oversight of a monitor. The receiver was terminated and replaced by a monitor and the asset freeze was lifted except that a portion of our assets are held in escrow against future customer refunds. Most of this amount has been returned. In February 2004 we received over $750,000 of the escrow money and contemplated the lifting of restriction on over $400,000 relating to our foreign subsidiary. It is impossible, at this time, to determine the full impact of this action. The proceeding has caused a reduction of our revenue and income in the fourth quarter of 2003 and first quarter of 2004 and resulted in substantial legal expenses. The asset freeze and escrow resulted in significantly reduced working capital and delayed certain implementation our new business direction and compelled us to initiate certain cost cutting measures. We are presently negotiating the terms of a final permanent injunction. We cannot predict the terms of the final order or when the terms will be finalized. Contact Center Business In 2003 we determined to change the direction of our business to that of a contact center company providing services for third parties using facilities we operate or will develop or acquire. In the fourth quarter 2003, management determined that our efforts and capital should be focused on implementing this change. We have hired additional executives and personnel for the development and management of contact centers and to obtain sales for new services. We also are incurring costs for due diligence, acquisition and physical improvements to contact centers, as well as professional fees and travel in conjunction with the establishment of these contact centers. In September 2003 we began to operate a call center, located in the Metro Manila suburb of Alabang in the Philippines which we acquired in 2004. We also have begun operations at our Eastwood facility in the Spring of 2004. We have entered into and will explore entering into new real estate and equipment leases for these and other centers of contact center operations. We will have additional expenses for the development of these contact centers The establishment of these operations will require the hiring of a substantial number of employees and other operating expenses. Our general and administrative expenses should increase substantially as these operations grow. While we will continue to maintain our ISP business we will devote less resources to marketing this business- - at times suspending marketing -as we focus our attention to our contact center business. This, among other factors, has resulted in a reduction in revenue from the ISP business which has not been immediately replaced by revenues from our new business Therefore if we do not have substantial revenues generated by new contact centers, we have, and may continue to will incur losses. 27 Trends The trend of our revenue and income over the next several quarters depends upon several variables, some of which cannot at this time be ascertained definitively. Revenue from ISP sources will decline as result of low and/or suspended ISP marketing activity. Based on the current rate of attrition of ISP customers we expect to derive significant revenues from our ISP business. We expect future ISP revenues to have a gross profit margin consistent with this quarter's results as there are low marketing costs and only a maintenance customer service cost associated with this revenue. Our contact center business revenue will increase with increasing seat development, and business development efforts. The delay in revenue production from the time a set of seats is completed is due to a number of factors, including but not limited to; contracting with an appropriate customer to utilize the seats, as well as the selection and training of qualified personnel. Both are processes that take time and care for effective implementation. During our initial phase of contact center operations we will incur development and startup losses. Depending on obtaining new contracts and implementing existing ones, we believe revenue from our contact centers will increase thereby off setting lost ISP revenues in the future. We believe this will most likely happen during the fourth quarter of this year to the first quarter of next year. Because of the variables involved we can give no assurance that our projected result will be met within the foregoing time frame or if at all. Comparison of 1st Quarter 2004 to 1st Quarter 2003 General Set forth below are comparisons of financial results for the quarters ended March 31, 2004 and 2003. These comparisons are intended to aid in the discussion that follows. This discussion and analysis should be read in conjunction with the financial statements and related notes contained elsewhere in this report. 28
March 31, 2004 March 31,2003 Changes % of Changes -------------- ------------- ------- ------------ (Restated) Item Revenue 4,876,148 12,366,775 (7,490,627) (60.6) Cost of Sales direct costs 1,304,354 5,983,628 (4,679,274) (78.2) Gross Profit Margin 3,571,794 6,383,147 (2,811,353) (44.0) Expense (exclusive of 4,110,546 3,724,705 385,841 10.4 Depreciation) Depreciation 100,994 35,999 64,995 180.6 Interest Expense (215,887) (165,893) (49,994) 130.1 Net Income (Loss) (859,555) 1,976,550 (2,836,105) (13.5) Cash, Accounts Receivable & prepaid Expense, etc. 5,798,350 4,857,324 941,026 19.4 Property and Equipment 2,123,506 448,356 1,675,150 373.6 (Net of Depreciation)
Our revenues decreased from $ 12,366,775 in the first quarter of 2003 to $4,876,148 in the first quarter of 2004. There is a correlation between the marketing of our ISP services and future revenues (after the trial period) for customers obtained during the marketing effort. Our telemarketing efforts for the latter part of 2003 were reduced (particularly after the FTC proceeding) and this caused a decrease in our revenue in subsequent periods including this first quarter. There was a minimum of marketing for the first quarter of 2004 and therefore we do not expect increased revenues in the second quarter of 2004. Our cost of sales include: (1) the direct costs of acquiring a new customer such as telemarketing and fulfillment costs and (2) the costs of maintaining our customer base including customer care costs and telecommunication costs for our internet provider services. The telemarketing and fulfillment costs are one time charges incurred when a customer signs up and represent the most significant component of cost of sales. Conversely, the costs of maintaining our customer base represent a much smaller component of cost of sales but are an on going cost. Our costs of sales in the first quarter of 2004 were approximately $4,679,274 lower than costs in the first quarter 2003. This decrease resulted because of a decline in telemarketing efforts due to our emphasis on our new business direction as well as the effects of the FTC proceedings. The cost of sales of 2003 reflects high telemarketing costs resulting form increased ISP marketing efforts in the first quarter of 2003. 29 Our gross profit was $3,571,794 in the first quarter of 2004 compared to $6,383,147 in the first quarter of 2003. The decrease in gross profit resulted from lower sales notwithstanding a reduction in costs. Notwithstanding the decrease in gross profit our gross profit margins increased substantially from 51.6% in the first quarter of 2003 to 73.3% for the first quarter of 2004 due to reduced marketing expenses. The greater the percentage of revenues from existing customers; with no current marketing costs the greater the profit margin. Total expense (exclusive of depreciation) increased from $3,724,705 in the first quarter 2003 to $4,110,546 in the first quarter 2004. Included in these expenses is an increase of $1,417,110 in selling, general and administrative expenses resulting from increased salary, travel and professional fees for our contact center business. This was in part offset by a substantial decline in expense for allowance for doubtful accounts. The allowance deceased by over 90%. The amount of the allowance is based upon the amount of the holdback and reserves of our billing houses which is a function of the amount of billing of our ISP business. As a result of the foregoing we had a loss from operations of $639,745 in the first quarter of 2004 compared to income from operations of 2,622,443 in the first quarter of 2003. We did not have any tax expenses in 2004 because of the operating loss carry. The liability for the first quarter 2003 was $ 480,000. As a result of all of the foregoing, we had a net loss of $859,555 for the first quarter 2004 compared to net income for the first quarter 2003 of $1,976,550. 30 COMPARISON OF FISCAL YEAR 2003 TO FISCAL YEAR 2002 General Set forth below are comparisons of financial results for the prior two fiscal years. These comparisons are intended to aid in the discussion that follows. This discussion and analysis should be read in conjunction with the financial statements and related notes contained elsewhere in this report.
2003 2002 (Restated) Changes % of Changes Item Revenue............................... 36,404,803 26,250,851 10,153,952 38.7 Cost of Sales........................ 16,725,774 17,781,967 (1,056,193) (5.9) Gross Profit.......................... 19,679,029 8,468,884 11,210,145 132.4 Expense (exclusive of Depreciation)... 14,869,142 10,223,529 4,645,613 45.4 Depreciation.......................... 214,299 98,557 115,742 117.2 Interest Expense...................... 542,280 497,702 44,578 9.0 Loss on extinguishment of Debt obligation....................... 9,550,700 (9,550,700) (100.00) Net Income (Loss)..................... 4,379,160 (11,944,922) 16,334,082 Cash, Accounts Receivable & Prepaid Expense, etc.................. 7,867,041 4,739,186 3,127,855 66.0 Property & Equipment (Net of Depreciation)................ 1,263,844 406,971 856,873 210.6
31 Our revenues increased from $26,250,851 in 2002 to $36,404,803 in 2003. There is generally a correlation between the marketing of our ISP services and future revenues (after the trial period) for customers obtained during the marketing effort. While our telemarketing efforts for the latter part of 2003 were reduced (particularly after the FTC proceeding) we nevertheless increased our revenue. This was because we had significant marketing campaigns in the latter part of 2002 and early 2003. In addition our customer base had grown substantially during the year so that high level of revenues were retained for a portion of the year even when our market efforts were diminished. Our revenue grew even though we could we could not bill our ISP customers for a portion of the year. Our cost of sales include: (1) the direct costs of acquiring a new customer as telemarketing and fulfillment costs and (2) the costs of maintaining our customer base including customer care costs and telecommunication costs for our internet provider services. The telemarketing and fulfillment costs are initial upfront charges incurred when a customer signs up and represent the most significant component of cost of sales. Conversely, the costs of maintaining our customer base represent a much smaller component of cost of sales. Our costs of sales in 2003 were approximately $340,000 lower than costs for 2002 despite an increase in revenues. During 2003 we had significant decrease in telemarketing expenses. This decrease resulted from reduced costs from using lower cost offshore facilities, a decline in telemarketing efforts due to our emphasis on our new business directions as well as the effects of the FTC proceedings. The cost of sales of 2002 also reflects high telemarketing costs resulting from increased ISP market efforts in the third quarter of 2002. Our gross profit was $19,679,029 in 2003 compared to $8,468,884 in 2002. The increase in gross profit resulted from higher sales accompanied by reductions in costs. Total expense (exclusive of depreciation) increased from $10,223,529 in 2002 to $14,869,142 in 2003. Included in these expenses is an increase of $ 3,768,718 in selling, general and administrative expenses. This increase was the result of the increased professional fees incurred in connection with our defense of the FTC Proceeding and increased expenses incurred with our new business consisting of increased salary, travel and professional fees. Fees paid to a related party increased by approximately $2,730,000. This was in part a result of increased payments under the payment agreement with these parties because of increased revenues of the ISP subsidiaries. The increase includes $1,050,000 for subcontract services primarily for our new business which was not incurred in 2002. As a result of the foregoing we had income from operations of $4,595,588 in 2003 compared to a loss of ($1,853,202) in 2002. In 2002, we had a loss on debt extinguishment of $9,550,700. This arose with an agreement of a noteholder not to call the note for a fixed period. This deferral of the right of demand was treated as an extinguishment of debt. The amount of the loss represents the value of the consideration received from us for this deferral. We also had a slight increase in interest in 2003 which was more than offset by a gain of $324,966 on a settlement of debt in connection with the reorganization of Savon. 32 We did not have any tax expenses in 2003 because of the use of net operating loss carry forward. As a result of all of the foregoing, we had net income of $4,379,160 for 2003 compared to a net loss of $11,944,922 in 2002. COMPARISON OF FISCAL YEAR 2002 TO FISCAL YEAR 2001
Item 2002 2001 - ---- ---- ---- (RESTATED) Revenues 26,250,851 $ 1,189,723 Cost of sales 17,781,967 $ 1,684,615 Selling, General 10,322,086 $ 2,304,865 and Administrative Expenses Net Operating (1,853,202) $ (2,799,757) Income (Loss) Net (Loss) (11,944,922) $ (2,984,598)
Our revenues increased from $1,189,723 in 2001 to $26,250,851 in 2002. This resulted because we had a full year's sales of the Internet Subsidiaries as well as increased monthly volume in 2002. Our gross profit was of $8,468,884 in 2002 compared to a loss of ($494,892) in 2001. The increase resulted from higher sales and the ability as a result of increased revenue to cover fixed costs accompanied by reductions in telemarketing and other third party costs per customers. During 2002, our selling, general and administrative expenses increased from $2,304,865 from $10,322,086 reflecting higher personnel costs to meet increased volume and development of new products. We have outsourced many customer service functions and reduced our payroll expense substantially. As a result, these costs may decrease relatively. 33 Interest expense increased approximately $448,000 in 2002 as a result of increased borrowings. As a result of all of the foregoing, we had a loss from continuing operation of $10,048,402 in 2002 compared to a such loss of $452,031 in 2001. Amortization expenses in 2001 were was approximately $360,000 reflecting nine months of amortization of the the National Online acquisition which occurred in 2001. Because we discontinued SavOn's then operations in 2001 we had a gain of approximately $267,000 in 2001 from discontinued operations compared to $43,318 of these costs in 2002. LIQUIDITY We had working capital of approximately $2,954,188 as of December 31, 2003 compared to a working capital deficit on December 31, 2002 of approximately $3,600,000. We had negative cash flow from operations in 2003 but had positive cash flow as a result of financings. Historical Cause of Prior Liquidity Issues of ISP Business Our liquidity problems in 2001 and early 2002 have arisen because there was a gap between collection of revenue and the payment of expenses. This resulted primarily because of the method of collection through local telephone companies that receive billing information from third party billing companies. There was a lag of as much as ninety (90) days between the time services to our customers are initiated and when we received the related revenue. One additional reason for this long initial collection cycle was the one month free service provided to the customer. While a lag existed in receipt of funds and the date services commence, there was no corresponding lag in our payables, including telemarketing fees, communications costs and other costs of obtaining and maintaining these customers. Telemarketing fees were due shortly after a customer was signed. In addition, the liquidity issue was partly exacerbated by uncollectible receivables, which. If we had a higher collection rate, we would have had more cash available. The size of the initial customer base was not sufficient to overcome the foregoing and therefore we had a substantial negative cash flow from this operation. As a result of the impact of the FTC Proceeding and expenses paid in connection with our new business,we did not have a positive cash flow from operations as of December 31, 2003. The growth of our customer base, increased revenue as well as steps we have taken to enhance cash flow substantially reduced the negative cash flow from our ISP business. Our telemarketing fees were billed monthly and were due 30 days from date of billing. National Online and other similar subsidiaries have taken additional steps to increase their cash flow including receipt of most receivables within sixty (60) days and receipt of advances prior to payment of receivables from billing companies and factors of a portion of the amount of the receivable. 34 Recent Liquidity Issues Prior to the FTC Proceeding, we believed we would be able to continue to meet our obligations arising from our existing business through cash flow from operations. As a result of the proceeding we were deprived of substantial cash due to the asset freeze and escrow. We also incurred substantial expenses and interruption of revenue and billing. As consequence we were unable to pay all our expenses in the normal course. We therefore were compelled to take several measures including the reduction of personnel, temporary reduction of executive salaries and postponement of most activity relating to our contact center business initiative. Notwithstanding modifications of the temporary restraining order through the stipulated preliminary injunction, resumption of marketing and billing, and release of substantial amounts of escrow funds, our operational liquidity problems continued until we received additional financing described below. Our contact center business direction required increased capital costs and operating expenses in excess of cash flow. While we had determined to proceed with our plan irrespective of financing, we would only be able to do so, on an timely basis with additional financing. We believe the financing described below will be adequate for this purpose as well as for our operational needs. COMPARISON OF CASH FLOW OF 2003 WITH 2002 Our cash and cash equivalent in 2003 were $1,342,186 compared to $722,674 for 2002. This increased arose from financing activities which resulted in positive cash flow of $2,576,279 compared to $272,983 on December 31, 2002. This increase arose from our preferred stock financing and convertible note financing resulting in gross proceeds of $2,351,000 and $500,000 respectively. This was offset by negative cash flow from investing activities and operating activities. The negative cash flow from investing activities in 2003 arose primarily from the purchase of $1,058,814 of equipment and property for our new business. Our operating activities had negative cash flow of $472,464 compared to positive cash flow of $679,870 for 2002. The decreased resulted primarily from the effects of the FTC proceeding, which resulted in significant revenue loss, and expenditures for our new business. Capital Transactions As of October 31, 2001 we entered into a Security Agreement and issued a promissory note to Brookfield Investment Ltd. in the amount of $2,474,000 to cover the prior advances made by Brookfield. The note was to be increased to reflect any future advances which ultimately were never made. The note is payable by us on demand and the principal amount (exclusive of interest accrued prior to the date of the note) accrues interest at a rate of 7% per year. The Security Agreement granted Brookfield a security interest in our accounts receivable as well as those of all our subsidiaries. 35 The parties agreed in principle on November 2, 2002, to modify the Brookfield Agreement and related note obligations to defer demand for payment (except on non payment defaults) until January 2005. Brookfield also agreed to subordinate its security interest to financing lenders. We agreed to pay accrued interest on the note by July 2003 and issued Brookfield a warrant to purchase 4,000,000 shares of our common stock at an exercise price of $.50 per share. In 2003 Brookfield also surrendered its entire security interest so that the note is presently unsecured. In 2003, two of our ISP shareholders entered into a factoring and security agreement with Thermo Credit, LLC. We were able to sell receivables for half face with the balance paid upon collection We paid fees to the factor depending upon the length of collection of the receivable sold. Upon completion of our note financing we terminated our factoring arrangements and paid the factor approximately $708,600. One of our billing agents also advances a portion of the amount billed on a factoring basis. In a June 2003 private placement, we sold 23,510 shares of our convertible preferred stock for an aggregate gross consideration of $2,351,000. For each share sold, the purchasers received five year warrants to purchase fourteen shares of our common stock of a total of an exercise price of $7.00 per share (which has since been reduced to $5.11 pursuant to the terms of the Warrant). The preferred shares are convertible at an initial conversion price of $3.50 which has been reduced to $2.00 for at least one year pursuant to performance standards. The price is subject to further anitdilution provisions. In July 2003, we extinguished over $400,000 of indebtedness consisting of principal and interest of two notes due unaffiliated telemarketing contractors in exchange for 127,117 shares of our common stock. In December 2003, we received $500,000 from a small group of primarily institutional lenders. We issued to the lenders seven percent one year secured notes convertible into shares of our Common Stock at $4.00 per share. We also issued to the lenders five year warrants to purchase 62,500 shares of our common stock at an exercise price of $5.00 per share. Both the notes and warrants are subject to antidilution provisions, including price dilution. The lenders have received a security interest but subject to certain conditions it is second to existing and future security interests. We have the right to compel conversion or exercise a portion of the notes and warrants depending upon market condition and other factors. 2004 Financing We have received $7.5 million in new financing through a placement agent, Maxim Group, LLC. Laurus Master Fund, Ltd. ("Laurus Funds") provided $5 million of financing to Epixtar pursuant to a secured convertible term note, of which $1,930,000 is to be held in a restricted cash account under the sole control of Laurus and may be released upon the fulfillment of certain conditions more fully described in the agreements with Laurus. 36 The term note is convertible at a fixed conversion price of $2.96. In connection with the issuance of the convertible term note, we also issued to Laurus Funds seven year warrants to purchase up to 493,827 shares of Epixtar's common stock at prices ranging from $4.05 to $4.66. Of these warrants to purchase 197,531 shares, are non-exercisable until the cash in the restrictive account is released. The remaining $2.5 million was raised through the private sale of convertible notes and common stock purchase warrants to accredited investors. Notes in the principal amount of $1,000,000 or "Bridge Notes" are convertible at a price of $2.37 per share and are secured. The holders of the remaining $1.5 million of convertible notes have the right to convert their notes into shares of the Company's common stock at a price of $2.96 per share or receive the repayment of their principal amount, plus interest. We have repaid $925,000 pursuant amount of the wedge noteholders the balance have converted into ___ shares of common stock. In addition, the holders of the notes received five year warrants to purchase an aggregate of 136,073 shares of the Company's common stock at initial exercise prices of between $5.05 and $4.66. The Bridge Notes and related warrants are required to be converted or exercised in certain circumstances. We also issued placement agent warrants in connection with each of the above transactions. We will thereby issue warrants to purchase an aggregate of 254,316 shares of common stock of which warrants to purchase approximately 67,564 shares will be deferred until the restrictive cash account referred to above is released. The terms of the placement agent warrants are varied, as a portion of these warrants were issued in connection with each transaction and the price and the number of shares have been determined in connection with each such transaction. The exercise and conversion prices of all the above securities are subject to price and other adjustment. Each of the Notes contain restrictions on certain actions we may take, including restrictions on dividends, stock repurchases, incurring indebtedness, creating security interests in our assets and changing of our business. All the above described securities are restricted and we have undertaken to file a registration statement covering the resale of shares of Common Stock issuable upon conversion of these notes and exercise of these warrants. QUANTITIES AND QUANTITIVE -- DISCLOSURE ABOUT MARKET RISKS Foreign Currency Risk We are exposed to market risk associated primarily with changes in foreign currency exchange rates. We have operations in the Philippines; however, both revenue and expenses of those operations are typically denominated in the currency of the country of operations, providing a natural hedge. 37 Our financial statements are presented in U.S. dollars and can be impacted by foreign exchange fluctuations through both (i) translation risk, which is the risk that the financial statements for a particular period or as of a certain date depend on the prevailing exchange rates of the various currencies against the U.S. dollar, and (ii)transaction risk, which is the risk that the functional currency of cost and liabilities fluctuates in relation to the currency of our revenue and assets, which fluctuation may adversely affect operating margins. With respect to translation risk, even though the fluctuations of currencies against the U.S. dollar can be substantial and therefore significantly impact comparisons with prior periods, the translation impact is recorded as a component of stockholders equity and does not affect the underlying results of operations. Seasonality Generally, our operations are not subject to seasonal factors. However, in December 2002, we reduced our ISP telemarketing activities because we believed potential customers would be preoccupied with holiday activities. For the same reason we did not resume our marketing efforts in late 2003 after we entered into the stipulated preliminary injunction in the FTC proceeding. BUSINESS INTRODUCTION We are primarily engaged in growing our contact center business in the Philippines. Our contact centers perform business process outsourcing or BPO services, for third parties. From July 2001 to the present substantially all our revenues have been derived from subsidiaries providing internet service to small businesses through third party dial up facilities. These services were marketed through independent contact centers that we supervised, many of which were overseas. Based upon the trend to foreign outsourcing and our expertise we have determined to focus our business efforts to provide call center services for third parties through our contact centers. An integral part of our plan is to utilize our own international contact centers either through development, acquisition or joint venture. We intend to take advantage of what we believe is a growing trend for United States companies to outsource marketing and other services overseas. Today, our contact center business represents only a small percentage of our revenue, but this business represents the focus of our management and capital. We believe that the primary source of our revenue will begin to change to our contact center business in the first quarter of 2005. 38 Our business is conducted through wholly owned subsidiaries. Recently we have determined to have our BPO agreements with clients entered into with our newly formed Bermuda subsidiary, Epixtar International Contact Center Group, Ltd. The performance of these agreements will be subcontracted to Epixtar Philippines IT Enabled Services Corporation, or other to be formed Philippines subsidiaries, the owner of our contact centers. National Online Services, Inc., Liberty Online Services, Inc.; Ameripages, Inc. and B2B Advantage, Inc. are our subsidiaries engaged in our ISP business (as described more fully below) and specifically not involved in our contact center business. We were organized as a Florida corporation in June 1994 under the name Pasta Bella, Inc. In 1997, we changed our name to Global Asset Holdings, Inc. We adopted our current name, Epixtar Corp., in 2002. We had no business until November 14, 2000, when we acquired an 80% membership interest in SavOnCalling.com, LLC. Savon was engaged in the marketing and resale of domestic and international telecommunications services. It is no longer in business and in 2003 completed a reorganization under the federal bankruptcy law. We acquired NOL in March 2001 from an affiliated party. CONTACT CENTER BUSINESS We have now determined to place our resources and energies in developing our contact center business rather than expanding our ISP business. Overview BPO involves contracting with an external organization to take responsibility for providing a business process or function. Companies initially used BPO to achieve cost savings in transaction-intensive, back office business processes. Today, in addition to cost savings, BPO adoption is driven by opportunities to improve a wide range of business processes and a desire to outsource non-core activities so that management can focus on its core products and services. Call center services, also known as tele-services, are enabled on a global basis by the availability of quality communications bandwidth at reasonable costs to such English speaking countries as the Philippines. The BPO market includes several functionally-oriented submarkets, such as human resources, procurement, sales and marketing, finance and accounting, customer management, facilities management and training. Demand for BPO services has experienced strong growth in recent years. According to International Data Corporation, worldwide demand for functional BPO services is expected to exceed $447 billion in 2004, and worldwide spending for outsourced customer management services, our primary industry segment, is expected to exceed $44 billion in 2004. 39 Current trends in BPO The scope of outsourced customer interaction has expanded to a scope from outbound telemarketing calls to a broad spectrum of customer management services, including customer care, technical support and in bound sales and internet based contact via e-mail and chat. The delivery platform has evolved from single facility, low technology call centers to large, high volume customer care centers that use advanced technology. Companies are now focused on optimizing their brands through improved customer care and increasing the value of their customer relationships by "up-selling" and "cross-selling" additional products and services. At the same time, global competition, pricing pressures and rapid changes in technology make it increasingly difficult for companies to cost-effectively maintain the in-house personnel and infrastructure necessary to handle all of their customer management needs. These trends, combined with rapidly expanding consumer use of alternative communications, such as the Internet and e-mail, has resulted in increased demand for outsourced customer management services. We believe the factors that influence companies to outsource services include: o significant cost benefits; - o the ability to free available resources and management to focus on developing core products and services; - o increasing capital requirements; and - o extensive and ongoing staff training and associated costs o targeted improved quality. - We expect corporations continue to shift business processes from internal operations to outsourced partners. International Data Corporation estimates that the worldwide market for outsourced customer management services will grow from $44 billion in the year 2004 to $64 billion by the year 2007. Trend toward offshore delivery of BPO services To attain high quality BPO services at a lower cost, many companies are moving selected front and back office processes to providers with offshore delivery capabilities. In recent years, fiber optic AND voip (Voice over internet protocol)telecommunications facilities have become widely available at affordable rates. At the same time, offshore providers have become more accepted and continue to grow in recognition and sophistication. As a result, a large number of BPO services companies have established offshore operations or operate exclusively offshore. 43 Philippine-based delivery model We have determined to establish our contact centers primarily in the Philippines. The Philippines is an attractive and growing market for offshore BPO services and, as an early entrant, we have successfully established ourselves as one of the market leaders. With the third largest English speaking population in the world, the Philippines has a large pool of skilled, college educated professionals who speak fluent English with minimal accents. Many Filipinos are familiar with Western business practices and have an affinity for U.S. culture, which we believe offers a particular advantage in interacting with U.S. consumers and processing U.S. business transactions. In addition, the Philippines has a well-developed telecommunications and utility infrastructure and an attractive business environment for BPO companiesWe have fiber optic based lines provided through leading communications companies to all of our locations in the Philippines. The Philippine government has encouraged foreign investment and provided significant assistance to our industry through the abatement of corporate income taxes, changes to the country's educational curriculum and relaxation of certain regulatory restrictions. The personnel and infrastructure available in the Philippines enables us to provide BPO at a substantially lower cost than U.S. outsourcing providers and, we believe, at generally comparable or superior quality levels. We believe our educated, English-speaking workforce enables us to provide consistently high quality BPO services at costs generally comparable to other offshore locations and substantially lower than the United States. 40 Implementation of our Contact Center Business We have taken the following steps to implement our contact center business: o hired additional executives and other personnel for the new operations o established subsidiary corporations for this operation o entered into preliminary arrangements to acquire call center assets in India ( since terminated)and have been operating a call center in the Philippines for which we have entered into a definitive agreement to acquire. o entered into leases for a twelve story building in the Manila area of the Philippines to be developed as a contact center. o acquired capital equipment and negotiated or entered into capital lease agreements negotiated and entered into agreements for outsourcing services. Through December 31, 2003 we have expended approximately $1,800,000 on the new operation and estimate an additional expenditure of approximately $ 800,000 in the first quarter of 2004. Firm UP We have decided to delay our entry into the Indian market and emphasize the advantages of the Philippines as an outsourcing destination. For the immediate future we will concentrate our efforts in the Philippines and not have any operation in India. As a result we did not pursue the preliminary arrangements we had entered into to acquire assets in India. We currently have approximately 600 contact center seats at two facilities in Manila in the Philippines. One of the facilities is in Alabang (a Manila suburb), which we have been operating since September 2003 and completed our acquisition of the center's assets in the 1st quarter 2004. This center is targeted for expansion to up to 600 seats. Our second facility is in Eastwood City Manila which we recently opened with 350 seats. The Eastwood City flagship facility will be developed to 1600 seats and will serve as our regional headquarters for the Philippines. 41 As we move forward with our seat development plan we will continue to hire additional supervisory and staff personnel to support our facilities as required. Additional capital equipment, by purchase or lease, in the Philippines and Miami will also be required for this expansion. In connection with our proposed expansion: o We have signed a letter of intent to lease approximately 2,600 square meters (about 28,000 sq. ft.) of new office space. The future three story call center site is anticipated to be ready for occupancy by 2nd quarter 2005. It is located in the city of Dumaguete, on Negros, in the Visayan Island region of the Philippines. The new facility, once completed, will add an additional 400 contact center seats to the Company's Philippine operations. o We have signed a letter of intent to lease approximately 5,500 square meters (about 59,201 sq. ft.) of new office space. The space represents top level of a two story building that should be ready for occupancy by September 2004. It is located in the Aseana area of Manila. The facility will add an additional 1600 contact center seats to the Company's Philippine operations. o We have entered into a letter of intent with Innovative Marketing Strategies, Inc. (IMS). The highlight of the proposed transaction is the acquisition of IMS Asia, a wholly owned subsidiary of IMS. IMS Asia operates a 150 seat facility that is targeted for expansion to 400 seats. The center is located in Makati, the central business district of Manila. IMS and IMS Asia have a complement of Fortune 500 clients in the financial services sector. All letters of intent are subject to conditions and may not necessarily result in a completed transaction. We are constantly exploring new opportunities to develop or acquire seats. We anticipate that each contact center will have the capability to operate 24 hours per day, 7 days per week. We are initially targeting full occupancy to the goal of two shifts depending on availability of contracts. In addition, each contact center will employ technical, administration and supervisory staff. Our contact centers are expected to have the capability for a variety of outsourcing purposes but will be primarily providing in bound and out bound calling services for our clients. Our contact centers could also be available to handle various other outsourcing services for clients, including data management, business processing and fulfillment services. The above description represents our present plans and is subject to change based upon the availability of financing and other factors. The absence of funds, construction and/or equipment delivery delays and other factors could prevent us from fulfilling all our plans and/or prolong the timetable. 42 Current Service Arranagements. In 2003 we entered into an agreement with a national telecommunications company pursuant to which we became an authorized sales representative to market one of the client's long distance services. We basically are engaged to handle soliciting orders and contracts, completing order and registration forms, transmitting completed contracts, orders received by us and assisting the client to resolve customer complaints. We have entered into a master service agreement with a major database company. Pursuant to this agreement we provided tele-verification services for the client's business data base. We place outbound calls to the database gathering as many data points as possible. We voluntarily suspended this program until it could be ramped up to our Eastwood facility. Epixtar has an exclusive off-shore services agreement for any and all sales or BPO work for a company that sells chemical supplies to businesses and home owners. The current scope of work includes outbound telesales to consumers in the North America, Australia and the United Kingdom. The program is being expanded to offer inbound customer care to the company. We have launched a pilot program with a major international bank for a telesales program to obtain new credit card accounts and obtaining a more comprehensive data base of the target customer base for new accounts. This includes but is not limited to an outbound Philippine consumer program that will primarily operate during Manila daytime hours. The pilot program reach a successful conclusion. Other Possible Services Our centers are designed to primarily deliver tele-services, that is services delivered via telephone or internet. Our contact centers would also be available to handle various other outsourcing services for clients, which would be performed during hours of operation when calling to within the continental United States would not be feasible. These services include, but are not limited to: o Transcription o Data Entry o Accounting o Fulfillment Services o Data Analysis o Programming BPO COMPETITION We believe that the principal competitive factors in our business include the ability to: 43 o provide high quality professionals with strong customer interaction skills, including English language fluency with minimal accents; - o offer cost-effective pricing of services; - o deliver value-added and reliable solutions to clients; - o provide industry specific knowledge and expertise; - o generate revenues for clients; and o provide a technology platform that offers a seamless customer experience. While we only recently commenced our contact center business we believe that we can compete effectively on all of these factors in the areas in which we are providing service. The global BPO services companies with whom we compete include offshore BPO companies and U.S. based outsourcing companies. There are numerous BPO companies based in offshore locations such as India, the Philippines, China, Latin America, the Caribbean, Africa and Eastern Europe. Our contact centers will face competition from other local established firms such as e-Telecare, Ambergris, Contact World, and Global Stride Further, certain larger US based call center companies have entered the Philippine local market. These companies also may have greater financial, personnel and other resources, longer operating histories, more recognizable brand names and more established client relationships. Most of these companies compete with us primarily on price and are often able to offer lower costs to potential clients. We seek to position ourselves as a service-focused company, with a workforce attuned to U.S. culture and a focus on revenue generation for our clients. In addition to our direct competitors, many companies choose to perform some or all of their customer care, technical support, collections and back office processes internally Contact Center Technology Our NOC or network operations center is housed in a collocation facility in Miami Florida. The NOC is the central point of our technology for our contact center business. It is the destination of all inbound calls, the originating point to the domestic phone network for outbound calls and the point of control for the CTI, or computer telephony integration. The NOC become the hub for our technology enabling monitoring of activities, calls, and network quality. The NOC is where the predictive dialer/ACD (automatic call distribution) technology resides. When we develop multiple centers the NOC will act as the hub for all global centers, enabling the operation of each center as part of a global virtual center. Such a virtual center allows for more efficient capacity management by directing spikes in utilization to any center connected on the network that has excess capacity. Calls are transmitted to and from the centers and agents via VOIP (voice over internet protocol) on leased broadband telecommunications lines to each center. The agent at each contact center location will be utilizing a personal computer and either an IP enabled phone, an analog or traditional phone or communicate directly through the PC enabled as an IP phone, depending upon the specific technology implemented in each case. 44 INTERNET SERVICE PROVIDER BUSINESS Our internet provider services or ISP services are sold by several subsidiaries, all of which provide similar services including access to the internet through dial up net works of third parties. Each subsidiary includes a different item of additional value. For example, one of our subsidiaries, B2B Advantage Online is an internet service provider that combines that ISP service with portal access to a third party service which provides extensive accounting and legal resources, including legal forms. Other subsidiaries provide online yellow page listings and customizable websites. Our internet service provider subsidiaries market their services exclusively to small business subscribers, much like America Online(R) markets membership primarily to residential customers. It is estimated that a substantial number of small businesses in the United States still do not have an online presence. We believe our subsidiaries meet the needs of this class of small business by providing nationwide unlimited Internet access and e-mail service; developing unique branded and customized Web sites and hosting services; featuring the business prominently in the online True Yellow Pages directory; registering the member-business in several major search engines; and, delivering simple online solutions for several areas of the member's business - all administered as one service for one monthly fee. The monthly fee covers the internet provider services, yellow page listing and software and other valued-added services or products. The fee is billed to the customer's telephone bill and remitted to us by billing houses. Each of the LECs and billing houses charge us a fee for billing and collection. Set forth below are the names of our ISP operating subsidiaries with the dates of each entity's original incorporation in Florida.
Corporation Date of Incorporation - ----------- ---------------------------------------- National Online Services, Inc. (1)......... February 22, 2001 Liberty Online Services, Inc. (1).......... December 12, 2001 Ameripages, Inc. (1)....................... February 13, 2002 B2B Advantage, Inc. (1).................... October 31, 2002 - ------------ (1) Each of these corporations is now a Delaware corporation.
ISP Customer Acquisition When we market our ISP services ,we acquire customers for our ISP services by direct contact through telemarketing. The value of our product or service is described through a sales script prepared by us that is presented by the agents of the call centers. Until recently this telemarketing effort was outsourced to independent contact centers. Recently we began marketing the product through our own contact centers. 45 We have utilized a form of marketing called "free to pay" conversion. This entails offering a free trial period for our services. If the customer does not cancel by the end of the trial period the services will continue and the customer will be billed. This method of marketing is sanctioned by the Direct Marketing Association and the Federal Trade Commission has published rules governing this type of marketing. To qualify for the free-trial offer, the customer provides advance consent for billing should he or she choose to remain a customer after the free-trial period ends. The authorization for billing is recorded for compliance with federal rules and quality control purposes. A charge for the service or product is submitted to the customer's phone company for billing and collected every month thereafter on the anniversary of the conclusion of the free-trial. Until recently our ISP subsidiaries primarily used unrelated third party call centers to market our services. The call center companies we utilized were located in the Philippines, the Caribbean, India and the United States. Our contract with these companies provided for the solicitation of customers in the United States solely with leads provided by us using our approved sales procedures, including required script and verification requests. The telemarketer is required to follow quality assurance procedures which are described under "Regulatory and Compliance Matters". Some of the independent telemarketers used to acquire ISP customers were entitled to a fee when they obtained a customer even if the customer canceled after the trial period. However, we have withheld payments from these companies for customers improperly obtained. We have also suspended and/or terminated the arrangement for material breaches of our marketing agreements. During 2003, we retained $453,680 of payments. In the course of review of verification recording files by an independent company based in Manila, Philippines, improprieties were discovered at three of our call centers located in India. As a consequence, we suspended sales activities at these centers. After investigation we implemented a series of measures to prevent future problems. At the same time we suspended marketing of our One Nation Calling Plan because this product was sold through these centers. We devote significant effort to complying with regulations governing the free to pay conversion program offered. It is essential that we obtain informed consent from our customer. We also comply with state and now federal do not call lists, which prohibit calls to persons on the list. The latter regulation only applies to residential telephone numbers and not businesses. Since our customers are businesses we do not believe the do-not-call rules will have a significant effect on us as long as we make certain we only call businesses. At the close of each business day, the call center sales data and verification recordings are uploaded to our server and then reviewed as part of our quality control, including review for compliance with law. Upon completion of the quality control process, the sales data files are processed. We automatically create customer websites in a variety of styles utilizing the customer provided information. E-mail and dial-up accounts are established upon acceptance. 46 A welcome kit is sent by mail. The kit is personalized for each customer and sent with a CD-Rom providing internet access, instructions for e-mail and website customization, and complete terms and conditions pertaining to the customer's obligation to cancel should he or she elect not to continue the service. We utilize contracted third party fulfillment houses to process the mailings. The 30-day free trial of the service for each customer begins upon receipt of their welcome kit. The billing department processes each customer's charges monthly on the anniversary date of the completion of his trial period. Third-Party Billing Companies for our ISP business We utilize the services of independent third party billing houses to process billing and collections for our ISP subsidiaries. The independent clearinghouses perform several significant functions for our ISP subsidiaries on our behalf. We submit our ISP billing to one or more billing companies on a weekly basis. These bills are screened to eliminate customers who are not served with a LEC that accepts billing or otherwise does not qualify. The bills are then submitted to the respective LEC, which in turn bills the customer. Collected funds are typically remitted to us within 60 to 90 days. The billing agent may also have contact with the customer when questions arise concerning the bill. Some billing companies offer advance funding arrangements with the availability and extent of funding differing greatly. These arrangements are generally in the nature of a factoring arrangement. The billing house purchases the receivable due us giving us a percentage of the amount. The balance less fees and charges are paid upon collection. One of these billing companies has terminated their relationship with us in early 2003. Our subsidiaries currently use three billing houses, ACI Billing Services, Inc., eBillit, Inc. a.k.a Payment One and Enhanced Services Billing, Inc. a.k.a. Billing Concepts. ISP Customer Care Our customer care has been outsourced to a call center in Manila. We are in the process of transitioning this operation to our Miami office. Customers might call customer care for a variety of reasons including technical questions about the Internet access, e-mail configuration or website editing; service questions such as what is their billing date or end of trial date; questions regarding phone card usage; premium redemption requests; cancellations; or other issues regarding the service or billing. We have full time trained customer care specialists who are subject to continuing formal and informal training. Each customer care specialist has real time computer access to relevant customer data including direct access to a customer's website and account configuration to provide technical assistance, a chronological history of events including sale, fulfillment, billing and inquiries. Calls arrive at the center either directly from calling customers or are transferred from the relevant billing companies whose 800 numbers generally appear on the customers' phone bill. 47 ISP Regulatory and Compliance Matters We devote significant effort to complying with regulations governing the free to pay conversion program we offer. In order to maintain our ability to serve customers and collect revenue, we have taken a proactive approach to resolving regulatory complaints or inquiries. In each of our lines of business. Our ISP Customer Care department has initial responsibility for inquiries and, if necessary, followed by consideration by our compliance department for those of our ISP subsidiaries. Most often, a resolution is achieved. Most of the regulatory and compliance issues revolve around allegations of unauthorized LEC billing arising from violations of the free to pay conversion rules. State Public Service Commissions, State Attorney General Offices, and the FTC attempt to prevent "cramming" or the addition of a specific charge or charges to a customer's local telephone bill without the proper authorization. We do not approve, or participate in, cramming. Our internal procedures reflect an absolute prohibition and zero tolerance for cramming. Through our billing agreements we have agreed to adhere to the highest disclosure standards. Our compliance policy includes the requirement that the telemarketer, among other things, uses an approved sales script and follows a prescribed verification procedure. We record each customer authorization and store the digital file for retrieval if needed to show compliance with the law. We believe we have taken extraordinary steps to ensure that we do not violate regulations relating to cramming. First we seek to avoid all sales in situations that a prospective customer may not realize a charge will be placed on the customer's phone bill after the trial period. Whether we are selling direct or through independent telemarketers, we do so by: o Making certain that the required script provided by us is adhered to by spot checks by personnel at the site and by our ability to monitor calls directly from our headquarters. o Making certain that the verification process has been adhered to by reviewing all verification recording by our personnel and by independent third parties. o Rejecting any orders where we are not satisfied that our procedures have been adhered to. o Reminding the customers by mail prior to the end of the trial period that the customer has the right to cancel. Sales not properly authorized are rejected. For sales that are properly authorized we then take steps to make certain that the customer during the free trial period is aware that they will be billed at the end of the free period. We do this by including a warning in our welcome package. This is followed by an e-mail and a pre-billing notice to the customer with the same information sent ten days prior to the billing date. In 2003, inquiries were made based upon alleged violations of state restrictions on calling residences, popularly known as "do not call" lists. Our target market for the ISP business has been solely businesses. These "do not call" restrictions do not apply to business telephone numbers. These complaints mainly have originated from individuals conducting their businesses at home who had improperly placed their numbers on these lists. We have procedures in place to suppress non-business phone numbers. 48 Despite our substantial compliance efforts we have received numerous complaints from governmental agencies and the Better Business Bureau. While complaints may be received informally, we are subject to formal regulatory inquires as well as formal proceedings in several states. In two states, we have negotiated settlements, which resulted in total payments for costs of less than $10,000 and a requested script change. While we believe our script is fully compliant with all regulations and not misleading we have agreed to the change as part of an ongoing policy of complying with all regulators, including those of state consumer protection agencies. See Item 3 Legal Proceedings for information concerning current material legal procedings ,including the FTC proceeding, and investigations against us. In addition to these proceedings customer complaints have resulted in the termination of arrangements with a billing house and a LEC. We do not believe these terminations have had a substantial impact on current revenues but future complaints may lead to further terminations. We therefore have increased our compliance efforts as discussed above. ISP COMPETITION Our internet provider service subsidiaries face competition from other larger and more established providers such as AOL(R) and Earthlink(TM). In each case, many of the competitors are well established, have reputations for success in the development and sale of services and products and have significantly greater financial, marketing, distribution, personnel, and other resources than us. These resources permit these companies to implement extensive advertising and promotional campaigns, both generally and in response to efforts by additional competitors to enter into new markets and introduce new services and products. Competition relating to our new business will consist of pricing and quality of service. ISP INTERNET TECHNOLOGY Our ISP subsidiaries utilize the underlying dial-up network services of Qwest and UUNet as resold to us through other suppliers. Customers receive customizable web sites, dial-up Internet access and up to six e-mail accounts. Our core customer network infrastructure is maintained in colocation facilities equipped with redundant systems (located in Virginia and Florida). The web, e-mail, database and authentication servers are comprised of Microsoft based systems. All management of the systems of our present business takes place from offices in Florida. 49 OTHER ACTIVITY During 2002, we introduced Financial Freedom and One Nation Calling Plan. Financial Freedom, a product introduced in 2002, was the result of a partnership between us and the Financial Freedom Foundation, to create a credit awareness and improvement product billed through bank account debits. We terminated the program during the fourth quarter of 2002 because of changes made to software relating to bank account debits. During 2002, we also introduced a long distance product, the One Nation Calling Plan, in what we believed was a competitive product targeted at small businesses for long distance, travel card, and toll-free access. Because of problems with call centers marketing this product and the need to reallocate expenses, we have suspended marketing of this product since February 2003, although we still service a small number of customers. At this time, we have not yet decided whether to resume marketing this product or market a substitute product. Our subsidiary One World Public Communications Corp. provides international direct dial service for coin telephones. Revenues from this service have been minimal. We believe this business has potential but we have devoted our resources to our other operations. In October 2003, we commenced the marketing of prepaid phone cards which has not resulted in significant revenue. EMPLOYEES As of May 31, 2004, we had 286 employees. Of that number, 9 employees are engaged in engineering and computer systems; 10 employees are engaged in marketing and sales; 31 employees are engaged in administration and finance, including officers of the Company 8 are in customer services, and 228 overseas employees. The number of our employees will be substantially increased as we open additional contact centers seats. PROPERTY Our office facilities consist of approximately 9,770 square feet of office space in total located in separate suites at 11900 Biscayne Blvd., Miami, Florida, 33181.In 2003 we executed an agreement to enter into a new lease at our present location replacing existing arrangements, eliminating some existing space and obtaining larger substitute space. Pursuant to this arrangement we are to lease a total of approximately 16,800 square feet. The lease is for five years at annual rentals ranging from approximately $328,000 to approximately $380,000 in the final year. Because construction of the substitute space was not completed, the rent until completion has been adjusted to reflect our continued occupancy of a lesser amount of space. 50 We have executed a seven year lease with a build-out provision for a facility consisting of eleven floors to house our Manila Call Center, which is under development. The facility consists of approximately 94,100 square feet for operations and another 41,980 square feet for parking space. The rent on this lease is paid quarterly and commences in July, 2004. With value-added tax and other taxes, the rent (for parking and office space) is approximately $53,580 in the first year increasing to $76,840 in the final year. Pursuant to such a lease with a separate landlord we are leasing an additional floor at this building. The foregoing amounts are based upon current currency exchange rates. In connection with the contemplated acquisition of call center assets in Alabang, Philippines, we anticipate receiving an assignment of a lease for the facility where the acquired assets are located. The lease to be assigned to us expires in 2006. The premises consist of two floors for a total of approximately 14,000 square feet. Base rent is presently $ 8,250 monthly which increases in increments to $ 9,100 in 12 months. We are also obligated to pay value added taxes and increases in real property taxes and other charges. The foregoing amounts are based on a currency exchange rate of 56 Philippine Pesos to 1 US Dollar. We also lease residences in the Manila area for personnel. Our technology for both the ISP operations and our new call centers is based in a network operations center located in a Miami collocation facility where the equipment of numerous other voice and data carriers are also located. We occupy a 200 square foot "cage" at 100 North Biscayne Boulevard, Miami Florida pursuant to a Building Access License Agreement expiring in 2006 at an annual rent of $48,000. We may enter into additional leases as we find new locations to acquire or develop contact centers. LEGAL PROCEEDINGS All our current proceedings arise out of our ISP business. Government Actions Relating To ISP Business On October 30, 2003 we and our subsidiaries, and an officer, William Rhodes, were sued and served with an ex parte temporary restraining order, asset freeze, order permitting expedited discovery, order appointing temporary receiver, and an order to show cause in an action commenced by the Federal Trade Commission in the United States District Court for the Southern District of New York. The order covers each of these entities, as well as their parents, subsidiaries, and affiliates. The proceeding arises out of alleged failures of our subsidiaries to comply with regulations relating to the conversion of a trial customer to a paying customer. We vigorously deny any wrongdoing and believe that our business practices are in compliance with all applicable laws. As of November 19th, 2003 without any finding of wrongdoing, we agreed in principle to enter into a preliminary injunction with the Federal Trade Commission. As a result we were able to resume our ISP business subject to the oversight of a monitor. The asset freeze was lifted except that a portion of our assets was held in escrow against customer refunds. An additional amount held by certain subsidiaries was subject to further resolution, which may result in all, or a portion of such funds being returned to us. We and the FTC are negotiating further resolution of the above-described dispute. As a result of the above action, we experienced substantial business disruption, incurred significant expense and reduction of our working capital. It is impossible at this time to determine the full impact of the proceeding. We are presently negotiating the terms of a final permanent injunction We cannot predict the terms of the final order or when ithe terms will be finalized. 51 On January 17, 2003, the Attorney General of Missouri filed an application for a temporary restraining order and preliminary injunction against certain of our subsidiaries alleging "cramming." We entered into a negotiated consent to the entry of the temporary restraining order and preliminary injunction because the consent action did not hinder the way our subsidiaries conduct their business and we do not condone cramming in any event. We have filed an answer to the request for a permanent injunction that vigorously denies any wrongdoing and that the allegations against us are without any basis in fact and without merit. On May 22, 2003, the Attorney General of North Carolina filed a complaint alleging "cramming" against certain of our subsidiaries, as well as a motion for temporary restraining order and preliminary injunction. As in the case with the Missouri action and for the same reasons, we entered into a negotiated consent to the entry of a temporary restraining order and preliminary injunction. Private Action On January 30, 2004 Dixon Aviation, Inc. commanded an action in the Circuit Court of Alabama for Barbour County against us, an officer, NOL, Liberty, a billing house and a LEC. This litigation was brought as a class action complaint for declaratory and injunctive relief, alleging that the Defendants engaged in cramming. We deny all liability and believe we have valid defenses to these claims (including recorded verifications). A motion has been made to remove the action to federal court and in addition we will move to dismiss the class action aspects of the claim. Pursuant to our arrangement with the LEC and billing house defendent we are obligated to indemnify the LEC and billing company defendants. Government Investigations From time to time, we also have received investigative process from various other states. The Attorney Generals of Florida, Texas, Minnesota and Kansas have issued process requesting certain information and documentary material concerning the operations of our ISP subsidiaries. The subsidiaries involved are responding in the appropriate manner and providing the information and documentation as required. In July, 2003, we received a subpoena from the Attorney General of Pennsylvania. This subpoena requested information and documentation relating to certain alleged business practices of our subsidiaries relating to "do not call regulations." We believed our response demonstrated compliance with the rule and that the matter is considered closed. 52 Arbitration Proceedings ETelecare International commenced an arbitration proceeding pursuant to an agreement amended from time to time to provide call center services to us. ETelecare has claimed that we have failed to pay for the service rendered. We have denied liability and will counterclaim for the return of $3,293,038.36 paid to eTelecare alleging eTelecare engaged in systemic fraudulent activity that caused us damage. LAWSTAR, INC. commenced an arbitration proceeding to recover 1,000,000 in connection with an agreement to provide a legal service access plan, marketed in a private label environment to B2B Advantage, Inc.'s small business customer. Lawstar has claimed that B2B has breached the contract and failed to pay for the services rendered. B2B denies liability because the contract was terminated and claimant was fully paid pursuant to the terms of the contract Bankruptcy of Subsidiary In August 2002, our subsidiary, Savon, filed a petition under Chapter 11 under the United States Bankruptcy code in United States Bankruptcy Court for the Southern District of Florida. Savon was a defendant in a lawsuit brought by Global Crossing Bandwidth, Inc., a wholesale telecommunications carrier that had an agreement to provide service to Savon. Global Crossing alleged $21,000,000 damages for breach of contract in its complaint, filed in the United States District Court for the Eastern District of Michigan. SavOn had asserted counterclaims against Global Crossing for breach of the agreement and tortuous interference with customers. In conjunction with Global Crossing's pending Chapter 11 proceeding, our counterclaim was stayed. We therefore could not obtain a judgment against Global Crossing and at the same time we would incur substantial defense costs. SavOn therefore filed for protection under the bankruptcy code. In connection with the proceeding, we advanced $65,000 to SavOn to settle a claim in connection with alleged distribution of Savon's assets for our benefit. The Plan of Reorganization has been confirmed by the Bankruptcy Court. 53 0FFICERS AND DIRECTORS Set forth below is information concerning our directors and executive officers: Name Age Position - ------------- --- -------- Martin Miller 64 Chairman of the Board, Director David Srour 43 President, Chief Executive Officer, Director Norman DePalantino 52 Chief Operating Officer Irving Greenman 68 Chief Financial Officer, Director Gerald Dunne 42 Executive Vice President Deborah Gambone 52 Vice President, Corporate Counsel and Secretary Ricardo Sablon 44 Vice President - Chief Technology Officer Harry Fozzard 37 Vice President-Marketing Sneharthi Roy 39 Vice President-Call Center Operations William D. Rhodes 56 President National Online, director and officer and director of other subsidiaries David Berman 58 Director John W. Cooney 68 Director Kenneth Elan 50 Director - ------------ Martin Miller has been our Chairman of the Board and Chief Executive Officer since October 2002. Mr. Miller has also been a private investor for the last twenty-five years and served on various boards of directors of both public and private companies. During this period he also acted as a United States manager of corporate finance for a foreign investment group. He was also our chief executive officer from 1997 to 2000 when we had no operations. David Srour has served as our President since June, 2003. He previously served as our Vice President and Chief Operating Officer from November 2001 through to June 2003. Prior to joining us, Mr. Srour was Senior Director of Information Service of Carr America Realty, a former client of his at KPMG Consulting in McLean, Virginia, where he was a Senior Manager from 2000 to 2001. At KPMG, Mr. Srour specialized in eCommerce, project management and process improvement consulting services. Beginning in 1997, he spent four years at Ernst and Young LLP, providing information systems and process improvement consulting services including back office and eCommerce implementations for such clients as General Motors, Lehman Brothers and Simon Property Group. Mr. Srour also has significant telecommunications experience, including roles as COO of Interactive Telecard Services, Inc. and SmarTel Communications. 54 Norman DePalantino was appointed our chief operating officer on April 16 2004. Previously from March 2001 he was President of ePerformance a call center and management consulting company that serviced all facets of the direct response market. From January 2000 to March 2001 he served as vice president of operations at Priceline.com where he managed the productivity of three outsourced call centers. Prior to that from March 1998 to January 2000 he was Vice President for operations and support at Home Shopping Network, an operating business of IAC/InterActiveCorp where he managed HSN's inbound and outbound sales services and back office processes for Ticketmaster, Espanol Network, MCI, First USA Visa, GE Capital as well as HSN's core television, Internet and catalogue sales initiatives. Mr DePalantino has been engaged in the building of call center operational infrastructures in Hong Kong, Shanghai and Tokyo. He retired in 1992 from the U.S. Air Force after 23 years. He was Director of Sales for Air Force recruiting. Mr. DePalantino has a B.S. in marketing from Regents College of the University of the State of New York and an M.A. in organizational management from the University of Phoenix. Irving Greenman has, since June 2000, served in various executive positions for us, including our Chief Financial Officer and Chief Executive Officer. From 1998 through 1999, he was Chief Financial Officer for Kaleidoscope Media Group, Inc. (an entertainment company). Prior to this, he was the Chief Financial Officer for Medica Media and Healthcare International. Both of which were engaged in the healthcare industry. Mr. Greenman is a Certified Public Accountant licensed in New York and in Florida. William D. Rhodes served as our President from January 2002 through June 2003 and is now President of the group comprised of our ISP subsidiaries. In February 2001, Mr. Rhodes was also the founding President of National Online Services, Inc. (presently our subsidiary establishing corporate infrastructure for this new Internet service provider of "B-to-B", he remains the current President of National Online and has been employed by us since the acquisition of National Online Services, Inc. in March 2001. Mr. Rhodes performed consulting services for us from September 2000 until February 2001. Prior to this, from February 1999 through July 2000, Mr. Rhodes served as Chief Operating Officer of Equalnet Communications Corp. in Houston, Texas with responsibility for all company operations including customer care, billing, provisioning and networks. From 1996 until 1999, Mr. Rhodes served as President and Chief Operating Officer of Valu-Line Communications in Longview, Texas. Mr. Rhodes has an MSEE and BSEE from the University of Missouri at Columbia and has been involved in state-of-the-art electronics, navigation and communication projects throughout his career including 20 years with Rockwell International. Ricardo Sablon is our telephony. 55 Gerald M. Dunne, Jr. has been our Executive Vice President in charge of Sales and Marketing since 2000. He was formerly the Chairman and Chief Executive Officer of Group Long Distance Inc., a NASDAQ traded long distance reseller from 1988 through 1999. Mr. Dunne led the company to over 200,000 residential and small business subscribers before leaving to become Chief Executive of our subsidiary, One World Public Communications Corp. Mr. Dunne also previously worked in the Accounting Department of Union Carbide Corporation in Danbury, Connecticut. Harry Fozzard has been our Chief Marketing Officer since mid-2002 in various executive positions. He joined us from LeanForward, Inc. of Houston, Texas where he was Chief Executive Officer from 2001 to 2002. From 2000 to 2001 he was Vice President of the eBusiness Group of HTE8 of Houston, Texas and from 1998 to 2000, he was an independent consultant for Equalnet Communications Corp. Sneharthi Roy has been our Vice President of Call Center Operations since July, 2003. From 2001 to 2003, he was employed as head of Call Center Operations for HCL Information Systems Ltd. of India. From 2000 to 2001 he was General Manager of Globsyn Technologies Ltd. He was regional manager of Atlas Copco AB Sweden from 1995 to 2000. Deborah Gambone has been our general counsel since December 2001 and was elected Secretary and a Vice President of ours in November 2002. From 2000 to 2001 she was a contracts manager and corporate counsel for Telecomputing, Inc. of Ft. Lauderdale, Florida. She also worked as in-house counsel for International Research Group, Inc. of Boca Raton, Florida from 1999-2000. Prior to this, she was corporate counsel for Global Mindlink Foundation, a non-profit entity specializing in funding charitable events for children. David Berman is a practicing attorney in Miami, Florida and a director since 2002. Since 1983, Mr. Berman has been a partner in Berman & Berman, a partnership in Miami, Florida specializing in tax law and business planning. Prior to this he was a member of the firm of Bedzow & Korn of Miami. Kenneth Elan has been a director since June 2003. He has been a practicing attorney in New York City for over twenty-five years. He specializes in litigation concentrating in corporate and commercial litigation. John W. Cooney has been a Director of ours since July, 2003. Since 2000, Mr. Cooney has been a Vice President for Lionstone Group, Inc., owner of the Seville and the Ritz-Carlton Hotels on Miami Beach, DuPont Plaza in Miami, Sheraton Curacao Resort, Princess Beach Resort Curacao, and Holiday Inn Aruba. From 1997 through 2000, he was President of Westbourne, Inc., an import-export company. He retired in 1997 from Coopers & Lybrand's Miami office where he served as Senior Tax Partner. While with Coopers & Lybrand, he served on several committees in the firm, having responsibility for review of all real estate tax oriented investments in which the firm was involved. Mr. Cooney provides tax and financial consulting services specializing in taxation, including foreign taxation, real estate and partnerships. Mr. Cooney has provided expert witness testimony in many proceedings involving real estate, condominium conversions and other related matters. 56 Executive officers are elected annually by the our Board of Directors to hold office until the first meeting of our Board of Directors following the next annual meeting of Shareholders and until their successors are chosen and qualified. Staff Relationships There are no family relationships among our executive officers or directors. Nevertheless, certain relationships exist between directors or significant shareholders and certain US based nonofficer management and staff employees of the Company. INFORMATION CONCERNING THE BOARD The Board of Directors held one meeting during the year ended December 31, 2003. During that year all other actions were taken through unanimous written consents. AUDIT COMMITTEE Prior to August 14, 2003, the Board of Directors acted as the Audit Committee as permitted by the rules of the Securities & Exchange Commission. Effective August 14, 2003, however, we established an Audit Committee consisting of three independent directors. John Cooney is chairman of the audit committee and our financial expert under the rules of the Securities & Exchange Commission. Mr. Cooney has over thirty years experience as a partner of a leading public accounting firm. He does not have nor does any other director member of the committee, have a prior relationship with us and each is independent under the rules of the American Stock Exchange. 57 ETHICS CODE The Company has adopted a code of ethics applicable to its chief executive officer and chief financial officer. The code is included as an exhibit filed with our Annual Report on Form 10 KSB for 2002. EXECUTIVE COMPENSATION The following table sets forth information concerning compensation paid or accrued by us or any of our subsidiaries for services rendered during the fiscal year ended December 31, 2003 by all persons who acted as a Chief Executive Officer and for the four highest paid officers earning in excess of $100,000 during 2003. SUMMARY COMPENSATION TABLE
Annual Compensation Long-Term Compensation Securities Underlying Bonus Name and Principal Position Year Salary ($) Awards Options - --------------------------- ---- ---------- -------- -------- Martin Miller (1)....................... 2003 None -- -- Chief Executive Officer................. 2002 None 2001 David Srour............................. 2003 $222,500 300,000 Chief Operating Officer................. 2002 186,969 50,000 2001 28,000 40,000 Irving Greenman (1)..................... 2003 285,000 200,000 Chief Financial Officer................. 2002 300,000 75,000 2001 200,000 200,000 Gerald Dunne............................ 2003 193,750 300,000 Vice President.......................... 2002 146,315 50,000 2001 50,000 Ricardo Sablon.......................... 2003 176,750 200,000 Vice President.......................... 2002 141,219 25,000 2001 75,414 150,000
- ------------ (1) Mr. Greenman was Chief Executive Officer until October, 2002 when Mr. Martin Miller assumed that position. 58 OPTIONS Set forth below with respect to the Officers named above is further information concerning options to purchase common stock under our stock option plan. OPTION GRANTED IN 2003
Number of Percent of total Securities options/granted Underlying to employees Exercise or Epiration Name options granted in fiscal year base price date - ------ --------------- ---------------- ------------ --------- David Srour...................... 300,000 7.7% 3.50 2008 Irving Greenman.................. 200,000 5.1% 3.50 2008 Gerald Dunne..................... 300,000 7.7% 3.50 2008 Ricardo Sablon................... 200,000 5.1% 3.50 2008
All of the options have a term of five years and have the same vesting terms.One third of the shares subject to the option vest on the first anniversary of grant with an additional third vesting on the next two anniversary dates. Options Exercised and Fiscal Year End Options Retained No options were exercised by any above named officer in 2003. The market price our common stock on December 31, 2003 was above the exercise price of all outstanding options and consequently all these options were in the money. Set forth below is certain information relating to options retained by the above named officers at December 31, 2003:
Number of securities underlying Value of unexercised in-the-money unexercised options at year end options at year end Name Vested Not Vested Vested Not Vested - ---------- ---------- ---------- ---------- ---------- David Srour............................ 26,667 313,333 $60,000 $705,000 Irving Greenman........................ 133,333 266,667 300,000 600,000 Gerald Dunne........................... 33,333 313,667 75,000 705,750 Ricardo Sablon......................... 100,000 250,000 225,000 562,500
59 Stock Option Plans We have adopted an option plan entitled the Global Asset Holdings 2001 Stock Option Plan (the "Option Plan"). The purpose of the Option Plan is to provide us with a vehicle to attract, compensate and motivate selected eligible persons, and to appropriately compensate them for their efforts, by creating a broad-based stock plan which will enable us, in our sole discretion and from time to time, to offer to or provide such eligible persons with incentives or inducements in the form of awards as such term is defined below, thereby affording such persons an opportunity to share in potential capital appreciation of our common stock. The Option Plan was approved by the board of directors and is subject to approval by the shareholders. A total of 4,000,000 shares of common stock are available for issuance under the plan. Under the Option Plan, an eligible person is any person who, at the applicable time of the grant or award under the Option Plan, is an employee, a director and/or a consultant or advisor of ours, or of any parent or subsidiary. An award can consist of. As of May 31, 2004, there were options outstanding to purchase 4,859,667 shares of common stock under the Option Plan. The Option Plan provides for the granting of options which are intended to qualify either as incentive stock options within the meaning of Section 422 of the Internal Revenue Code of 1986 or as options which are not intended to meet the requirements of such section ("non-statutory stock options"). The exercise price of all incentive stock options must be at least equal to the fair market value of such shares on the date of the grant or, in the case of incentive stock options granted to the holder of more than 10% of our common stock, at least 110% of the fair market value of such shares on the date of the grant. The maximum exercise period for which incentive stock options may be granted is ten years from the date of grant (five years in the case of an individual owning more than 10% of our common stock). The aggregate fair market value (determined at the date of the option grant) of shares with respect to which incentive stock options are exercisable for the first time by the holder of the option during any calendar year shall not exceed $100,000. The Option Plan provides for its administration by the board of directors or a committee chosen by the board of directors, which has discretionary authority, subject to certain restrictions, to determine the number of shares issued pursuant to incentive stock options and non-statutory stock options and the individuals to whom, the times at which and the exercise price for which options will be granted. The above description of the Option Plan is qualified in its entirety by reference to the full text of the Option Plan, as well as the terms and conditions of any award agreement governing the grant of an award under the Option Plan. A copy of the Option Plan is included as an exhibit. 60 Additional Options in 2004 On May 28 2004, we have granted additional options to purchase 150,000 shares of our common stock at $3.55 per share to our employees and service providers including options to an officer to purchase 60,000 shares of our common stock. Director Compensation Other than the payment of $500 per meeting to outside directors, we have no compensation arrangements with our directors. In July 2002, we granted a stock option to David Berman pursuant to our Stock Option Plan to purchase 100,000 shares of our common stock at forty-two cents ($0.42) per share. In 2003, we issued options to purchase 50,000 shares to each of John Cooney and Kenneth Elan at exercise prices of $4.50 and $3.50 respectively. All of the foregoing options described in this paragraph are substantially similar to the options granted executive officers described above We recently initiated a new independent director compensation package. Each will receive $10,000 per annum and $5,000 for the audit committee. SECURITY OWNERSHIP The following table sets forth certain information regarding beneficial ownership of the common stock as of, June 2004 by, each stockholder known by us to be the beneficial owner of more than 5% of the outstanding common stock, o each director of ours, o each named officer, o and all directors and executive officers as a group. Except as otherwise indicated, we believe that the beneficial owners of the common stock listed below, based on information furnished by such owners, have sole investment and voting power with respect to such shares, subject to community property laws where applicable The address of all the following is 11900 Biscayne Boulevard Miami Florida 13181. 61
Name of Number of Shares Approximate Beneficial Owner Beneficially Owned Percentage - -------------------- ------------------ -------------- Martin Miller (1)(2)........................................ 2,873,921 26.2% Stanley Myatt (1)........................................... 2,778,000 25.3% Sheldon Goldstein........................................... 900,000 8.2% David Srour (3)............................................. 93,334 * Irving Greenman (3)......................................... 166,666 1.5% David Berman (3)............................................ 51,666 * Ricardo Sablon (3).......................................... 133,333 1.2% Gerald Dunne (3)............................................ 100,000 * John Cooney (3)............................................. 16,667 * Kenneth Elan (3)............................................ 16,667 * Directors & Officers as a group(1)(3)....................... 3,618,921 30.9%
- ------------ * Less than 1%. (1) Including shares, registered in the name of Trans Voice LLC. Each of Messrs. Miller and Myatt is deemed to beneficially own this percentage of shares of common stock owned by Trans Voice by virtue of their or their affiliate's 50% ownership of Trans Voice Investments Inc. which owns 98% of Trans Voice LLC. (2) Includes 95,921 shares owned by Mr. Miller and his spouse. It does not include 122,500 shares owned by his spouse which Mr. Miller denies any beneficial ownership. (3) Represents shares underlying options exercisable within 60 days. In addition to these options additional shares are subject to options not exercisable within 60 days as follows: Irving Greenman..................................... 233,334 David Berman........................................ 33,333 Kenneth Elan........................................ 33,333 David Srour......................................... 246,666 John Cooney......................................... 33,333 Ricardo Sablon...................................... 216,667 Gerald Dunne........................................ 250,000 All officers and directors as a group............... 1,606,666 Both Brookfield Investments Ltd. And Laurus Master Fund, Ltd. are record owners of more than five percent of common stock as determined by relevant securities regulation. Brookfield owns of record 770,000 shares and warrants to purchase 3,750,000 shares of our Common Stock. We have been advised by Brookfield that all of our securities held by it are held as nominee for unrelated third parties none of whom own a significant portion of our securities. Therefore there is no owner of the shares owned by Brookfield which has a fair percent on greater interest. Laurus owns a $5,000,000 Secured Convertible Term Note which is convertible into 1,689189 shares of our common stock and warrants to purchase 493,827 shares. Both the note and warrant contain a provision that prohibits conversion or exercise, if upon such conversion or exercise Laurus would own 4.99% or more of the outstanding shares of common stock. This provision does not apply to defaults and may be waived by Laurus. 62 Equity Compensation Plan Information Set forth below is information relating to shares subject to options under compensation plans, including shares subject to options granted, for both plans approved and not approved by stockholders, the weighted average exercise price of these options and the number of shares which may be subject to options to be granted in the future.
Securities Securities issuable Weighted- remaining Plan Category upon exercise average available - ------------ -------------------- ------------ ------------ Equity compensation plans approved by security holders.............. 4,000,000 $3.36 None Equity compensation plans not approved by security holders.............. 859,667* $3.50 *1,290,333 Total..................................... 4,859,667 $3.38 1,290,000
* In November 2003 the board of directors approved an amendment to an existing stock option plan increasing the number of shares subject to the plan from 4,000,000 shares to 6,000,000 shares. The amendment will be presented for stockholder approval at the next stockholders meeting. The shares are part of the increased number of shares subject to the plan. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS On November 14, 2000 we acquired the entire interest of Trans Voice Investment Ltd. in SavOn, a Florida limited liability company. Trans Voice Investment, Ltd.'s which ultimately was an 80% interest in Savon. The consideration for Trans Voice Investment Ltd.'s entire interest in SavOn was 2,000,000 shares of our common stock. The original agreement provided for the issuance of additional shares if during the six month period between January 1, 2001 to June 30, 2002 the accumulated net after tax income of SavOn was greater than $1,200,000. Then for each $1.00 of any such excess of net after tax income of Trans Voice Investments Ltd. was to receive additional shares having a market value of $10.00 per share. Due to the cancellation of the SavOn's agreement with Global Crossing, SavOn discontinued its telecommunications business. Trans Voice Ltd. claimed that it was deprived of its right to additional shares as Savon would have no earnings. In lieu of all claims of Trans Voice Investment, Ltd. against us, we paid an additional $225,000 that was treated as part of the purchase price. On March 31, 2001, we acquired all the shares of National Online Services in exchange for 2,000,000 of our shares. At the time Trans Voice Investment Ltd. owned 80% of National Online Services, and was a principal stockholder with the balance was owed by Sheldon Goldstein. Prior to the transaction, Trans Voice Ltd. also held 2,000,000 shares or thirty three and one third percent of our stock. As part of the transaction, we agreed to pay additional contingent consideration to the former shareholders of National Online, if during the eighteen month period between April 1, 2001 and September 30, 2002, the accumulated net after tax income of National Online was $1,200,000 or greater. In that event, we were required to issue a number of our additional shares equal to any excess divided by ten. During 2001 the former owners of National Online claimed that we failed to commence National Online's operations timely and adequately fund it. As of November 30, 2001, the shareholders and we agreed to eliminate the contingent right and settle all claims in consideration for an additional 2,500,000 shares of our common stock and was a principal stockholder. The value of the stocks was $5,750,000 based on the market price of our stock at the time. 63 In April 2001 National Online Services, Inc. entered into an oral agreement to pay TransVoice Investments, Inc. $4.00 per customer (per month). On October 1, 2001, the agreement was modified because the parties agreed that the payments would become excessive and burdensome. Trans Voice Inc. is unaffiliated with Trans Voice Ltd. Pursuant to the Payment Agreement National Online and other subsidiaries are obligated to pay Trans Voice Inc $150,000 per month as long as National Online and affiliates operates their ISP programs. In addition, Trans Voice Investments, Inc. is to receive $1.00 for each additional customer in excess of 100,000 customers in any given month. National Online is also obligated to provide office space and services to Trans Voice Investments, Inc. The agreement constitutes consideration for services including services as a finder provided in connection with the organization of National Online. Messrs. Stanley Myatt and Martin Miller, or their affiliates, are sole stockholders of Trans Voice Investments, Inc. This corporation, together with Messrs. Miller and Myatt, individually own the entire interest of Trans Voice L.L.C. which has been our principal shareholder since June 2002. Mr. Miller is our chief executive officer. Subject to certain third party approvals the parties to the agreement have agreed to limit the payment obligation to $5,100,000 of which $600,000 is to be paid upfront and the balance in monthly installments of $250,000 through December 2005. We have determined to outsource many aspects of the development of our new business plan. We have entered into an agreement with Trans Voice LLC, our principal stockholder, to find, contract with, pay and supervise an entity to assist in the development of our new business, including assisting us in: o Managing existing vendor relationships for sales campaigns and growth to meet and liven up new business needs. o Managing site selection, lease negotiations, design and build-out, of Epixtar's offshore call centers. o Negotiating incentive and financial assistance packages with government ministries and agencies on behalf of Epixtar. o Identifying commercial opportunities for Epixtar to sell new services and developing new products for Epixtar to market. o Identifying and negotiating merger and acquisition situations for Epixtar. The arrangement requires Trans Voice to pay the third party and for us to reimburse Trans Voice for these payments. Trans Voice receives no separate consideration for this arrangement and any payment it receives is merely reimbursement of amounts paid or to be paid to the subcontractor. 64 In the third quarter of 2002, we repaid loans aggregating $175,000 to Trans Voice Inc. and Stanley Myatt. The loans bore interest at seven percent per annum. Based upon agreements in principle reached on November 20, 2002, we entered into an agreement on December 6, 2002 relating to the note to Brookfield Investments Ltd. The note is in the amount of approximately $2,454,000 and due on demand. We obtained an agreement to defer demand for payment for over two years, and for Brookfield to subordinate its security interest in our and our subsidiaries' accounts receivable to certain types of lenders. We agreed to issue 3,000,000 shares of the our restricted common stock and agreed to repay accrued interest by July 2003. We retained the right to prepay the loan without any penalty at any time. The stock was never issued pending negotiations that began in December 2002. After these negotiations, the agreement was amended ab initio to provide for issuance of warrants to Brookfield to purchase 4,000,000 shares of our common stock at an exercise price of $.50 per share in lieu of issuing the 3,000,000 shares to Brookfield. The warrants are exercisable during the period from May 31, 2003 until May 31, 2006. Subsequent to March 2003 Brookfield voluntarily agreed to surrender its security interest. Trans Voice LLC has entered into an agreement pursuant to which it will be compensated for any clients and acquisition candidates it introduces to us with whom we consummate a transaction. From time to time during 2003 and 2004, Messrs. Myatt and Miller or their affiliates have advanced amounts on behalf of us on an interest free basis. DESCRIPTION OF SECURITIES General The following description of our capital stock does not purport to be complete and is subject to and qualified in its entirety by our certificate of incorporation and bylaws, which are included as exhibits to the registration statement of which this prospectus forms a part, and by the applicable provisions of Florida law. We are authorized to issue up to 50,000,000 shares of common stock, $.001 par value per share, of which shares were issued and outstanding as of 2004. Our certificate of incorporation authorizes 10,000,000 shares of "blank check" preferred stock, of which we authorized the issuance of 250, 000 Series A preferred Stock of which 23,510 shares are outstanding. 65 Common Stock Subject to the rights of holders of preferred stock, holders of shares of our common stock are entitled to share equally on a per share basis in such dividends as may be declared by our Board of Directors out of funds legally available therefore. There are presently no plans to pay dividends with respect to the shares of our common stock. Upon our liquidation, dissolution or winding up, after payment of creditors and the holders of any of our senior securities, including preferred stock, if any, our assets will be divided pro rata on a per share basis among the holders of the shares of our common stock. The common stock is not subject to any liability for further assessments. There are no conversions or redemption privileges nor any sinking fund provisions with respect to the common stock and the common stock is not subject to call. The holders of common stock do not have any pre-emptive or other subscription rights. Holders of shares of common stock are entitled to cast one vote for each share held at all stockholders' meetings for all purposes, including the election of directors. The common stock does not have cumulative voting rights. Preferred Stock Our Board of Directors has the authority, without further action by the holders of the outstanding common stock, to issue shares of preferred stock from time to time in one or more classes or series, to fix the number of shares constituting any class or series and the stated value thereof, if different from the par value, and to fix the terms of any such series or class, including dividend rights, dividend rates, conversion or exchange rights, voting rights, rights and terms of redemption (including sinking fund provisions), the redemption price and the liquidation preference of such class or series. Series A Preferred Stock In conjunction with the June 2003 financing, our board of directors created a new Series A Convertible Preferred Stock, with 250,000 shares of this series authorized. These shares have the following terms. Conversion: Each share of Series A Preferred Stock will be convertible, at the option of the holder, at any time after the date of issuance into a number of shares of Common Stock determined by dividing $100 by the Series A Conversion Price which was initially $3.50 but was reduced to $2.00 as a result of our inability to meet performance standards described below. Performance Adjustment: The conversion price may be adjusted based upon our performance in 2003 and 2004 as set forth below: ADJUSTED CONVERSION YEAR NET INCOME PRICE ---- ---------- ---------- 2003 less than $5,000,000 $2.00 $5,000,000 - $7,500,000 $3.00 2004 less than $10,000,000 $2.00 $10,000,000-$12,500,000 $3.00 66 The adjusted price, if any, will not be greater than 5% below market value at the time of the adjustment, but may not be below $2.00. Anti-dilution Protection: With some exceptions including shares issued pursuant to a merger or acquisition, or a lease line or line of credit, if the Company issues or sells stock below the then current conversion price, then the conversion price shall be reduced to the price of the sale or issuance. The conversion price of the Preferred Stock will also be subject to adjustment to reflect stock dividends and stock splits. Automatic Conversion: The Series A Preferred will be automatically converted into Common Stock upon the earlier to occur of: (1) the closing of a public offering of our common stock at ten dollars or more per share with gross proceeds of $50,000,000 or (2) the vote of the holders of a majority of the Series A Preferred voting separately as a single class. Dividend Rights: Holders of Series A Preferred shall be entitled to receive cumulative dividends at an annual rate of $8.00 per share from legally available funds. A pro-rata portion of unpaid or understated dividends will be taken into account upon conversion or redemption Liquidation Preference: In the event of any involuntary or voluntary liquidation, dissolution, or winding up of us, the holders of Series A Preferred shall be entitled to receive, prior and in preference to any distribution to the holders of Common Stock, a liquidation payment in an amount equal to two times the Series A Price per share plus any unpaid dividends. Voting Rights: Subject to any additional voting rights provided by law), the Series A Preferred vote on an as-converted basis together with the Common Stock on all matters presented to stockholders. Protective Provisions: We are required to obtain approval of Series A Preferred holders for actions which could have an adverse effect on the Series A Preferred including any actions resulting in: any change in the rights, preferences or privileges of the Series A Preferred advisor. o a change of control. o a change in any business other than the business engaged in by the Company at the time of Closing. Board Representation: The holders of the Series A Stock are entitled to one seat on our board, or at the option of the shareholders observer rights to the board. All related attendance expenses will be paid by us. The Preferred shareholders have not designed a person to act as direction or observer. 67 Redemption Right: We have the right to repurchase the total aggregate amount outstanding of Series A Preferred on each anniversary date of the closing of this financing at a price equal to $200 per share subject to the right of the holder to exercise before repurchase. Convertible Notes Secured Convertible Term Note Amount Outstanding: The principal amount of this note is $5,000,000 of which $1,930,000 is held in a restrictive account by LAURUS. Unless converted the funds are to be released upon the fulfillment the following conditions: (i) the effectiveness of a registration statement covering shares subject to the note and warrants issued to Laurus; (ii) the entire $ 1,000,000 amount of Bridge Notes described below has either been fully converted into common stock and/or been repaid in full in cash and (iii) Laurus shall have received written notification satisfactory to it from us special Federal Trade Commission ("FTC") counsel, that a stipulated order settling the existing FTC action has been executed by the Epixtar and FTC staff counsel, and has been forwarded to FTC headquarters in Washington D.C. for review and final approval by the FTC. Interest: Interest on the portion of the note which is not restricted the "prime rate" published in The Wall Street Journal from time to time, plus two and one half percent (2.50%) the interest payable on the portion of the principal amount of note maintained in the Laurus Restricted Account shall be equal to 1% per annum Term: Unless accelerated or converted the note is due May 14, 2007. Conversion: The term note is convertible at a fixed conversion price of $ 2.96 or 1,689,189 shares subject to adjustment without taking into account shares which may be issued upon conversion of interest. Conversion Price Adjustment: If at any time prior to the conversion or repayment in full of the principal amount any shares of common stock or securities convertible into common stock are issued al less than the fixed conversion price in effect at the time of such issuance then the fixed conversion price shall be adjusted. Repayment: Repayment of the principal amount of the unrestricted portion of the note shall be made in equal monthly installments of $90,909.09, together with any accrued and unpaid interest on the portion of the principal repaid. Payments shall begin on October 1, 2004 and shall continue to maturity. In addition, in the event that any funds are released from the Laurus restricted account for any reason other than as a result of a conversion the amount released shall be applied in equal amounts to each future monthly payment occurring after the 90th day following such release. Any principal amount that remains outstanding on the Maturity Date shall be due and payable on the Maturity Date. 68 Method of Repayment: If the average closing price of our Common Stock for the five (5) trading days immediately preceding a payment was greater than or equal to 110% of the fixed conversion price, the holder shall convert all or a portion of the monthly installment, in lieu of cash payment, in shares of Common Stock the number of shares, however, converted may not exceed twenty five percent (25%) of the aggregate dollar trading volume of the Common Stock for the five (5) day trading period immediately preceding delivery of a Notice of Conversion. Any part of the monthly installment not converted into shares of Common Stock shall be paid in cash at the rate of 102% of the monthly payment. Restrictions: The Notes contain restrictions on certain actions we or our subsidiaries may take, including restrictions on dividends, stock repurchases, incurring indebtedness, creating security interests in our assets and changing our business. Security: The notes are secured by all our assets and the assets of our material operating subsidiaries. Redemption Right: The Borrower will have the option of prepaying the Note by payiment one hundred thirty percent (130%) of the principal amount of this Note together with accrued but unpaid interest thereon and any and all other sums due upon seven (7) business days prior notice. Bridge Notes Amount Outstanding: The principal amount of these notes is $1,000,000 Interest: Interest is at 8% per annum Term: Unless accelerated or converted these notes are due April 22, 2005 Conversion: The note may be convertible by the holder at a conversion price of $2.37. Conversion Price Adjustment: The Conversion Price, and the number of shares to be received upon conversion of the Notes will be subject to adjustment to reflect stock dividends, stock splits and stock combinations, as well as upon merger, sale of assets or reclassification. Standard weighted average anti-dilution protection will be applied for issuance of additional shares below the Conversion Price or 69 Automatic Conversion: The notes are automatically converted upon the closing of an underwritten public offering of common stock pursuant to an effective registration statement with gross proceeds of $25,000,000 or more provided, that there is an effective registration statement with a current prospectus available covering for resale of the Common Stock underlying the Notes. Required conversion: Provided there is an effective registration statement with a current prospectus available providing for resale of the Common Stock underlying the Notes, we may, at our option, require the conversion,of up to 20% of the original amount of the Notes, plus accrued and unpaid interest if the market price of the Common Stock is $6.00 or greater for twenty (20) consecutive trading days and the average daily trading volume of the Common Stock during that period is at least 30,000 shares a day. We may also,at it our option, require the conversion, of up to an additional 20% of the original amount of the Notes, plus accrued and unpaid interest if the market price of the Common Stock is $7.00 or greater for twenty (20) consecutive trading days and the average daily trading volume of the Common Stock during such twenty (20) day period is at least 50,000 shares a day. Protective Provisions: The notes contain limitations on certain actions we may take including the incurrence of indebtedness on investments unrelated to our business, on dividends and distributions and repurchases asset sales, on management and employee options Security: These notes are covered by the same security as the Secured Convertible Term Note pursuant to an intercreditor agreement. 7% secured convertible notes Amount Outstanding: The principle amount of these notes is $500,000 Interest: The interest rate is 7% per annum Term: These notes are due December 8, 2004 Conversion: The note may be converted by the holder at a conversion price of $2.50 (after a performance adjustment based on 2003 results similar to that contained in the terms of our preferred stock and described above. 70 Conversion Price Adjustment: The conversion price shall be adjusted if with some exceptions including shares and issued pursuant to a merger or acquisition, or a lease line or line of credit, we issue or sell stock below the then current conversion price. Automatic Conversion: The notes are automatically converted into Common Stock upon the closing of a public offering of our common stock at ten dollars or more per share with gross proceeds of $50,000,000. Required Conversion: We may require conversions if the notes at the current conversion price once each consecutive 90-day period until maturity, of up to 20% of the original principal amount plus accrued interest in the event that the market price of our common stock is $10.00 or greater for thirty (30) consecutive trading days prior to the date of any notes we may only do so if there is an effective registration statement covering the resale of the shares subject to the Note with current prospectus available. Redemption Right: We have the right to repurchase the total aggregate amount outstanding of the notes at a price of 103% of the amount of the notes. Security: The notes are collateralized by a security interest in accounts receivable which may be in effect subordinated to other security interests of ours as long as $1,000,000 is free of these prior interests. Warrants Brookfield Warrants We have issued warrants to Brookfield Investments Ltd. to purchase 4,000,000 shares of our common stock at fifty cent per share. The warrant expires in May 2006. The exercise price is adjusted based upon stock splits, reverse splits and similar occurrences. Sands Bros Investment Banking Warrants In April 2003, we issued warrants to purchase 130,000 shares of our Company stock to Sands Brothers & Co., Ltd. with whom we had entered into an investment banking arrangement. These warrants expire in October 2008 and are exercisable at $3.39 per share subject to antidilution provisions. These warrants were distributed to designees of Sands Brothers. The agreement with Sands Brothers has been terminated. 71 Private Placement Warrants: In June 2003, we issued warrants to purchase 329,140 shares of our common stock pursuant to our private placement. These warrants expire in June 2008 and were initially exercisable at $7.00 per share. The registration rights agreement we entered into with these purchasers provided for a reduction of the warrant exercise price if we did not have an effective registration statement covering the sale of the shares upon conversion of the preferred stock and exercise of the warrants within 90 days of the grant of the warrants. As a result, the exercise price of the warrants has been reduced to $5.10 per share and may be further reduced to take in account antidilution provision. The exercise price of these warrants is also adjusted upon stock splits, reverse splits, reclassification and sales of stock below the exercise price. We also issued warrants to purchase 64,341 shares of our common stock to Sands Bros and Alpine Capital Parties Ltd. who provided services in connection with our private placement. These warrants expire in June 2008 and are exercisable at 5.00 per share. Warrants Granted to Vendors In July 2003, we issued five-year warrants to purchase 27,742 shares of our common stock at an exercise price of 5.00 per share to Alpine Capital Partners for services. Warrants Granted to Investment Adviser We have granted 100,000 five-year warrants to a Maximum Group LLC. an investment adviser in consideration for services to be rendered to us. The Warrants are exercisable at a price of $ 6.00 per share. Warrants Issued to 7% Noteholders In connection with the our 7% convertible debenture sale we issued to the noteholders five year warrants to purchase 62,500 shares of our common stock at an exercise price of $5. The price is subject to dilution including price dilution. In addition the exercise price is reduced by 10% each 90 days we fail to file a registration statement, covering the shares subject to the notes and warrant. Once consecutive 90-day period until maturity, we may require the exercise, at the Exercise Price, of up to 20% of the original number of warrants in the event that the market price of the our common stock is $10.00 or greater for thirty (30) consecutive trading days, provided there is an effective registration statement covering the resale of the shares subject to the warrant with current prospectus available. Bridge Warrants In connection with the our Bridge Notes we issued to the noteholders five year warrants to purchase 34,722 shares of our common stock at an exercise price of $5.05. The exercise price and number of shares is subject to price dilution and the number of shares may be increased if we do not timely file a registration statement convey the underlying shares to these warrants and the notes. Provided there is an effective registration statement with a current prospectus available providing for resale of the Common Stock issuable upon exercise of the warrant, we may, at our option, require the conversion, of up to 20% of the original amount of the Notes, plus accrued and unpaid interest if the market price of the Common Stock is $6.00 or greater for twenty (20) consecutive trading days and the average daily trading volume of the Common Stock during that period is at least 30,000 shares a day. We may also, at our option, require the conversion, of up to an additional 20% of the originalnumber of warrants, plus accrued and unpaid interest if the market price of the Common Stock is $7.00 or greater for twenty (20) consecutive trading days and the average daily trading volume of the Common Stock during such twenty (20) day period is at least 50,000 shares a day. 72 Wedge Noteholder Warrants In connection with the wedge noted described above we issued to the noteholders five year warrants to purchase shares of our common stock at an exercise price of $4.05. The price is subject to dilution including price dilution. The number of warrants increases if we do not timely file our registration statement covering the shares subject to the notes and warrant. Provided there is an effective registration statement with a current prospectus available providing for resale of the Common Stock underlying the warrants, we may, at our option, require the exercise, of up to 20% of the original amount of the warrants, plus accrued and unpaid interest if the market price of the Common Stock is $6.00 or greater for twenty (20) consecutive trading days and the average daily trading volume of the Common Stock during that period is at least 30,000 shares a day. We may also, at our option, require the exercise of, of up to an additional 20% of the original amount of the warrants, plus accrued and unpaid interest if the market price of the Common Stock is $7.00 or greater for twenty (20) consecutive trading days and the average daily trading volume of the Common Stock during such twenty (20) day period is at least 50,000 shares a day. Laurus Warrant We issued two warrants to Laurus in connection with our note transaction. These warrants expire in May 2011. One warrant is to purchase 296,29 shares of our common stock. The exercise price is $4.05 for the first 164,609 shares and a price of $4.46 for any additional shares purchased. The second warrant is only exercisable if the restricted cash held by Laurus is released. This warrant is for the purchase of 197,531 shares. The exercise price is $4.46 for the first 32,922 shares acquired and $4.66 for any additional shares purchased hereunder. Both warrants have a cashless exercise features. Placement Agent Warrants In connection with our 2004 note transactions we issued warrants to purchase 254,317 shares of common stock. Of these, warrants to purchase 34,722 shares are exercisable at $5.55; warrants to purchase 219, 595 shares are exercisable at 4.45, of which warrants to purchase 67,568 shares may not be exercised until the restrictive cash is released. The warrants are similar to the Bridge Noteholders warrants except these warrants provide for cashless exercise. 73 Transfer agent The transfer agent for our common stock is Interwest Transfer Company, Inc. of 1981 East 4800 South Street, Salt Lake City, Utah 84117. Their telephone number is (801)-272-7294. Disclosure of Commission Position on Indemnification for Securities Act Liabilities Our bylaws provide that we will indemnify our officers and directors for costs and expenses incurred in connection with the defense of actions, suits, or proceedings against them on account of their being or having been directors or officers of, absent a finding of misconduct in the performance of their duties. Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to our directors, officers and controlling persons pursuant to the above described provisions, or otherwise, we have has been advised that in the opinion of the Securities and Exchange Commission their indemnification is against public policy as expressed in the Securities Act of 1933 and is, therefore, unenforceable. In the event that a claim for indemnification against these liabilities (other than the payment by us of expenses incurred or paid by any director, officer or controlling person of the small business issuer in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, issuer will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act of 1933 and will be governed by the final adjudication of the issue. Anti-takeover Provision of Florida Law Section 607.0902 of the Florida Business Corporation Act prohibits the voting of shares in a publicly-held Florida corporation that are acquired in a "control share acquisition" unless the holders of a majority of the corporation's voting shares (exclusive of shares held by officers of the corporation, inside directors or the acquiring party) approve the granting of voting rights as to the shares acquired in the control share acquisition or unless the acquisition is approved by the corporation's board of directors, unless the corporation's articles of incorporation or bylaws specifically state that this section does not apply. A "control share acquisition" is defined as an acquisition that immediately thereafter entitles the acquiring party to vote in the election of directors within each of the following ranges of voting power: (i) one-fifth or more, but less than one-third of such voting power: (ii) one-third or more, but less than a majority of such voting power; and, (iii) more than a majority of such voting power. Our bylaws do not negate this provision of the Florida law. 74 Shares Eligible for Future Resale We presently have 11,158,338 shares of common stock issued and outstanding of which 6,516,615 shares are "restricted securities," which may be sold only in compliance with Rule 144 under the Securities Act of 1933, as amended or other exemptions from registration requirements of this act. Rule 144 provides, in essence, that a person holding restricted securities for a period of one year after payment therefore may sell, in brokers' transactions or to market makers, an amount not exceeding 1% of the outstanding class of securities being sold, or the average weekly reported volume of trading of the class of securities being sold over a four-week period, whichever is greater, during any three-month period. (Persons who are not our affiliates and who had held their restricted securities for at least two years are not subject to the volume or transaction limitations.) Substantially all of our presently issued shares of common stock will be capable of sale pursuant to Rule 144 subject to the foregoing limitation including our 7,800,000 shares which are 144 eligible or will be by July 2004. The sale of a significant number of these shares in the public market may adversely affect prevailing market prices of our securities. SELLING SHAREHOLDERS Set forth below is a description of the transactions pursuant to which securities were issued to the selling stockholders as well as additional information. In connection with the execution of an investment, advisory agreement between us and Sands Brothers & Co. Ltd., a broker dealer, we issued five year warrants to pur 130,000 shares of our common stock to Sands Brothers. These warrants are exercisable at $3.39 at per share. These warrants were later distributed to persons associated with Sands Brothers. The Investment Advisor Agreement has terminated. We had no relationship with Sands Brothers prior to this transaction. Included in the number of shares of the selling stockholders are shares issuable (or in one case issued upon conversion of preferred stock and exercise of warrants in our Preferred Stock provide placation. In a June 2003, we sold 23,510 shares of our convertible preferred stock for an aggregate gross consideration of $2,351,000. For each share sold, the purchasers received five year warrants to purchase fourteen shares of our common stock or a total of 329,140 at an exercise price of $7.00 per share (which has since been reduced to $5.10 pursuant to the terms of the Warrant). The preferred shares are convertible at an initial conversion price of $3.50 which has been reduced to $2.00 for at least one year pursuant to performance standards. The conversion price and exercise price are both subject to anitdilution provisions. 75 In connection with the preferred stock, private placement we issued five year warrants to provide a total of 64,243 shares of our common stock at an exercise price of $5.00 per share to persons who assisted us, including Sands Brothers and Alpine Capital Partners Group. We also issued five year warrants to Alpine Capital Partners to acquire 27,728 shares of our Common stock at 5.00 per share. The resale of the shares issuable upon exercise of these options in addition to the shares subject to these warrants, Sands brothers has received warrants to purchase an additional 84,466 shares of our common stock in connection with a subsequent private placement. The shares subject to these warrants are subject to the concurrent offering. In July 2003 we issued 127,117 shares of our common stock in satisfaction of over an aggregate of $400,000 of indebtedness consisting of principal and interest of two notes due K&L International Enterprises, Inc. and Caribe Telesales Consultants unaffiliated telemarketing contractors. These contractors provided services to us and the notes represented amounts due for this service. We issued 100,000 five year warrants to acquire our shares of our common stock at $5.00 per share to Maxim Group LLC upon signing of a advisory agreement. The resale of shares issuable upon exercise of these warrants is included herein. Maxim Group has been issued warrants to purchase 169,857 shares of common stock for acting as a placement agent in our recent 2004 note offerings. The resale of these shares is subject to the concurrent offering. In addition an affiliate of Maxim owns an additional 250,000 warrants.Therefore Maxim and its affiliates presently own 519,857 shares of common stock subject to warrants. In December 2003, we sold our 7% convertible notes issued in connection with loan to us of $ 500,000 the note is now convertible into 200,000 shares of our common stock. We also issued to the lenders five year warrants to purchase 62,500 shares of our common stock at a present exercise price of $4.00 per share. The resale of these shares is included. An affiliate of some of these purchasers entered into a advisory agreement and acquired 50,000 shares of our common stock. In April 2004 we purchased assets at a Philippines contact center and issued 64,035 shares of our common stock. These shares are included. The following table contains information concerning the beneficial ownership of our common stock by the selling stockholders. The table assumes all of the shares being offered will be sold and unless otherwise described these shareholders do not own any additional shares of our common stock. Because the selling stockholders may sell all, some or none of the shares that it holds, the actual number of shares that will be sold by the selling stockholders upon or prior to termination of this offering may vary. The selling stockholders may have sold, transferred or otherwise disposed of all or a portion of their shares since the date on which they provided the information regarding their common stock in transactions exempt from the registration requirements of the Securities Act. Additional information concerning the selling stockholders may be set forth from time to time in prospectus supplements to this prospectus. 76 Identity of Shares Stockholder or Group Offered Name Michael R. Hamblett(1) 13,440 Wolverine Trading, LLC(1)(8)(9) 64,000 Truk Opportunity Fund, LLC(1)(10) 12,800 Abingdon Investments, LLC(1) 66,700 SDS Merchant Fund, LP(1)(9) 320,000 Daniel A. Gooze(1) 128,000 trustee Otape Investments LLC(1)(11) 192,000 WEC Partners(1)(12) 64,000 James Ricchiardi(1) 66,700 Cristopher Fiore(1) 64,000 CD Investment Partners(1)(13) 101,033 Steven B. Rosner(1) 224,000 Judith Barclay(1) 64,000 Wayne Saker(1) 64,000 MSS Children's Trust(2) 29,250 SSS Children's Trust(2) 29,250 Howard Sterling(2) 39,500 Edmund Belak 19,000 Bruce Silver(2) 13,000 Sands Brothers(3) 30,657 Alpine Capital Partners(4) 61,314 K&L International Enterprises(5)(14) 32,036 Caribe Telesales Consultants, Inc.(5) 95,081 Maxim Partners, LLC(6) 100,000 Generation Capital Associates(7)(15) 200,000 The Hart Organization Corp.(7)(16) 26,250 Howard Commander(7) 26,250 I-Call(8) 65,034 (1) Shares issued or issuable in connection with securities acquired in our preferred stock private placement. These include shares subject to preferred stock and warrants. Except in the case of shares already issued upon conversion the foregoing does not reflect additional shares, which may be issued for accrued dividends. 77 (2) Shares issuable upon exercise of the advisory warrants originally issued to Sands Brothers. Each person had a relationship as employee, consultant or affiliate of Sands Brothers at the time they acquired these warrants. (3) These shares are subject to warrants for services in our private placement. (4) These shares are subject to warrants for services in connection with our Preferred Stock private placement and for future services. (5) Shares acquired in satisfaction for telemarketing fees payable to these holders. (6) Shares subject to warrants issued in connection with an investment advisory agreement. Maxim Partners LLC, owns 98% of Maxim Group LLC, a registered broker dealer. MJR Holdings LLC owns 72% of Maxim Partners LLC. Mike Rabinowitz is the sole manager of MJR Holdings and has principal voting and dispositive power with respect to the securities owned by Maxim Partners LLC. (7) Shares issued upon conversion if our 7% convertible secured notes and related warrants. (8) Wolverine Trading Funding A, LLC is owned by Robert Bellick, Christopher Gust and Eric Henchel. (9) SDS Capital Partners, LLC is the partner of SDS Merchant Fund, LP. general (10) Michael E. Fein and Stephen E. Saltzstein, as principals of Atoll Asset Management, LLC, the managing member of Truk Opportunity Fund, LLC, exercise investment and voting control over the shares. Both Mr. Fein and Mr. Saltzstein disclaim beneficial ownership of the common stock owned by this selling shareholder. (11) OTAPE INVESTMENTS LLC is owned by OJA Financial Group LP. (12) WEC PARTNERS LLC is owned by Ethan Berkowitz, Jaime Hartman and Daniel Saks. (13) John Ziegelman, as President of CD Capital Management, LLC, the investment manager of CD Investment Partners, Ltd., may be deemed to have beneficial ownership of the shares of Epixtar Corp. common stock underlying the Series A Preferred Stock and Warrants owned by CD Investment Partners, Ltd. Mr. Ziegelman disclaims beneficial ownership of such shares. (14) K & L International Enterprises, Inc. is individually owned by Larry Powalisz. (15) This entity is beneficially owned by High Capital Finding which is beneficially owned by Frank Hart. 78 The Hart Organization Corp. is beneficially owned by Frank Hart. Plan of Distribution Sale of the shares may be made from time to time by the selling stockholders, or subject to applicable law, by pledgees, donees, distributees, transferees or other successors in interest. These sales may be made: o on the over-the-counter market o on foreign securities exchange o in privately negotiated transactions or otherwise o in a combination of transactions at prices o at terms then prevailing o at prices related to the then current market price o at privately negotiated prices Without limiting the generality of the foregoing, the shares may be sold in one or more of the following types of transactions. o A block trade in which the broker-dealer so engaged will attempt to sell the shares as agent but may position and resell a portion of the block as principal to facilitate the transaction purchases by a broker or dealer as principal and resale by such broker or dealer for its account pursuant to this Prospectus; o an exchange distribution in accordance with the rules of such exchange; o ordinary brokerage transactions and transactions in which the broker solicits purchasers; and o face-to-face transactions between sellers and purchasers without a broker dealer. In effecting sales, brokers or dealers engaged by the selling stockholders may arrange for other brokers or dealers to participate in the resales. Brokers, dealers or agents may receive compensation in the form of commissions, discounts or concessions from the selling stockholders in amounts to be negotiated in connection with the sale. These brokers or dealers and any other participating brokers or dealers may be deemed to be "underwriters" within the meaning of the Securities Act in connection with such sales and any such commission, discount or concession may be deemed to be underwriting discounts or commissions under the Securities Act. 79 Information as to whether underwriters who may be selected by the selling stockholders, or any other broker-dealer, is acting as principal or agent for the selling stockholders, the compensation to be received by underwriters who may be selected by the selling stockholders, or any broker-dealer, acting as principal or agent for the selling stockholders and the compensation to be received by other broker-dealers, in the event the compensation of such other broker-dealers is in excess of usual and customary commissions, will, to the extent required, be set forth in a supplement to this prospectus. Any dealer or broker participating in any distribution of the Shares may be required to deliver a copy of this prospectus, including a prospectus supplement, if any, to any person who purchasers any of the Shares from or through such dealer or broker. We have advised the selling stockholders that during if at any time they may be engaged in a distribution of the shares they are required to comply with Regulation M promulgated under the Exchange Act. The selling shareholders have acknowledged such advice by separate agreement and agree therein to comply with such regulation. In general, Regulation M precludes the selling stockholders, any affiliated purchasers and any broker-dealer or other person who participates in such distribution from bidding for or purchasing or attempting to induce any person to bid for or purchase any security which is the subject of the distribution until the entire distribution is complete. A "distribution" is defined in the rules as an offering of securities that is distinguished from ordinary trading activities and depends on the "magnitude of the offering and the presence of special selling efforts and selling methods". Regulation M also prohibits any bids or purchases made in order to stabilize the price of a security in connection with the distribution of that security. We have agreed to indemnify the selling stockholder against certain liabilities, including liabilities under the Securities Act of 1933, or to contribute to payments to which such stockholder may be required to make in respect thereof. Legal Matters The validity of the common stock offered hereby will be passed upon for Epixtar Corp. by Michael D DiGiovanna Esq., 212 Carnegie Center, Suite 206, Princeton New Jersey 08540. Experts Our financial statements included in this prospectus and elsewhere in the registration statement, to the extent and for the periods indicated in their respective reports, have been audited by Rachlin Cohen & Holtz LLP and Liebman Goldberg & Drogin LLP independent certified public accountants, whose reports thereon appear elsewhere herein and in the registration statement. 80 Available Information We have filed with the Commission, Washington, D.C. 20549, a Registration Statement on Form SB-2 under the Securities Act with respect to our common stock offered hereby. This prospectus does not contain all of the information set forth in the registration statement and the exhibits and schedules to the registration statement. For further information with respect to us and our common stock offered hereby, reference is made to the Registration Statement and the exhibits and schedules filed as a part of the Registration Statement. Statements contained in this prospectus concerning the contents of any contract or any other document are not necessarily complete; reference is made in each instance to copy of such contract or any other document filed as an exhibit to the registration statement. Each such statement is qualified in all respects by such reference to such exhibit. We are subject to the informational requirements of the Securities Exchange Act of 1934, as amended and in accordance therewith file annual, quarterly and special reports, proxy statements and other information with the SEC. The registration statement, including exhibits and schedules thereto, may be inspected without charge at the Commission's principal office in Washington D.C., and copies of all or any part thereof may be obtained from the Public Reference Section of the Commission, 450 Fifth Street, N.W., Washington, D.C. 20549, after payment of fees prescribed by the Commission. The Commission also maintains a WorldWideWesite that provides access to reports, proxy and information statements and other information regarding registrants that file electronically with the address http://www.sec.gov. 81 You should rely only on the information contained in this document. We have not authorized anyone to provide you with information that is different. This document may only be used where it is legal to sell these securities. The information in this document may only be accurate on the date of this document. Additional risks and uncertainties not presently known or that are currently deemed immaterial may also impair our business operations. The risks and uncertainties described in this document and other risks and uncertainties which we may face in the future will have a greater impact on those who purchase our common stock from the Selling stockholder. These purchasers will purchase our common stock at the market price or at a privately negotiated price and will run the risk of losing their entire investment. Until ___________________, 2004, all dealers that effect transactions in these securities, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to the dealers' obligation to deliver a prospectus when acting as underwriters and with respect to their unsold allotments or subscriptions. Typist make into column from prior page 82 EPIXTAR CORP. AND SUBSIDIARIES INDEX TO FINANCIAL STATEMENTS PAGE ---- REPORTS OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS F-1 - F-2 CONSOLIDATED FINANCIAL STATEMENTS Balance Sheets F-3 Statements of Operations F-4 Statements of Stockholders' Equity (Deficiency) F-5 Statements of Cash Flows F-6 Notes to Financial Statements F-7 - F-38 REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS The Board of Directors Epixtar Corp. and Subsidiaries Miami, Florida We have audited the accompanying consolidated balance sheet of Epixtar Corp. and Subsidiaries as of December 31, 2003, and the related consolidated statements of operations, stockholders' equity (deficiency), and cash flows for the year then ended. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit. We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Epixtar Corp. and Subsidiaries as of December 31, 2003, and the consolidated results of their operations and their cash flows for the year then ended, in conformity with accounting principles generally accepted in the United States. As more fully described in Note 3, the Company is subject to certain profitability and liquidity issues. Management's plans with respect to those issues are also presented in Note 3. RACHLIN COHEN & HOLTZ LLP Miami, Florida March 17, 2004 F-1 The Board of Directors Epixtar Corp. and Subsidiaries Formerly Global Asset Holdings, Incorporated and Subsidiaries Miami, Florida We have audited the accompanying consolidated balance sheets of Epixtar Corp. and Subsidiaries formerly Global Asset Holdings, Incorporated and Subsidiaries as of December 31, 2002, and the related consolidated statements of operations, stockholders' equity, and cash flows for the years ended December 31, 2002 and 2001. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Epixtar Corp. and Subsidiaries as of December 31, 2002, and the consolidated results of their operations and their cash flows for the years ended December 31, 2002 and 2001, in conformity with accounting principles generally accepted in the United States. The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 2 to the financial statements, the Company has suffered recurring losses from operations and has a negative working capital, which raise substantial doubt about the Company's ability to continue as a going concern. Management's plans regarding those matters are partially discussed in the Notes to financial statements. The accompanying financial statements for the years ended December 31, 2002 and 2001 have been restated as discussed in Note 2. Liebman Goldberg & Drogin, LLP Garden City, New York March 11, 2003, except for Note 2 as to which the date is April 5, 2004 F-2 EPIXTAR CORP. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
March 31, December 31, 2004 2003 2002 ---------- ---- ---- ASSETS (Unaudited) (Restated) Current Assets: Cash and cash equivalents (includes amounts held in escrow of $855,502 in 2003) $ 146,014 $ 1,342,186 $ 722,674 Restricted cash 416,721 416,721 -- Accounts receivable, net 4,749,768 5,609,675 3,802,326 Prepaid expenses and other current assets 313,014 227,203 59,940 Deferred billing costs 172,833 271,256 154,246 ------------ ------------ ------------ Total current assets 5,798,350 7,867,041 4,739,186 ------------ ------------ ------------ Property and Equipment, Net 2,123,506 1,263,844 406,971 ------------ ------------ ------------ Other Assets: Goodwill 3,360,272 3,360,272 3,360,272 Deposits and other 467,827 491,637 76,716 ------------ ------------ ------------ Total other assets 3,828,099 3,851,909 3,436,988 ------------ ------------ ------------ Total assets $ 11,749,955 $ 12,982,794 $ 8,583,145 ============ ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY) Current Liabilities: Debt, current portion $ 274,844 $ 121,513 $ 483,786 Accounts payable 2,608,482 3,009,932 3,211,934 Accounts payable subject to compromise -- -- 385,401 Accrued interest 227,087 175,185 274,988 Accrued expenses and taxes 348,684 146,566 1,123,676 Deferred revenue 873,505 1,459,657 2,897,693 Note payable, stockholder 2,395,513 -- -- ------------ ------------ ------------ Total current liabilities 6,728,115 4,912,853 8,377,478 ------------ ------------ ------------ Long-Term Liabilities: Note payable - stockholder -- 2,369,350 2,264,700 Debt, net of current portion 50,031 23,603 88,451 Common stock to be issued 424,375 279,000 -- ------------ ------------ ------------ Total long-term liabilities 474,406 2,671,953 2,353,151 ------------ ------------ ------------ Commitments and Contingencies -- -- -- Stockholders' Equity (Deficiency): Convertible preferred stock, $.001 par value; 10,000,000 shares authorized; 23,510 shares issued and outstanding in 2003 (liquidation preference $4,702,000) 24 24 -- Common stock, $.001 par value, 50,000,000 shares authorized; 10,677,067, 10,643,734 and 10,503,000 shares issued and outstanding 10,677 10,644 10,503 Additional paid-in capital 18,451,362 18,442,395 13,391,873 Accumulated deficit (13,914,629) (13,055,075) (15,549,860) ------------ ------------ ------------ Total stockholders' equity (deficiency) 4,547,434 5,397,988 (2,147,484) ------------ ------------ ------------ Total liabilities and stockholders' equity (deficiency) $ 11,749,955 $ 12,982,794 $ 8,583,145 ============ ============ ============
See notes to consolidated financial statements. F-3 EPIXTAR CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Ended March 31, Year Ended December 31, 2004 2003 2003 2002 2001 ---- ---- ---- ---- ---- (Unaudited) (Unaudited) (Restated) (Restated) Revenues $ 4,876,149 $ 12,366,775 $ 36,404,803 $ 26,250,851 $ 1,189,723 Cost of Sales 1,304,354 5,983,628 16,725,774 17,781,967 1,684,615 ------------ ------------ ------------ ------------ ------------ Gross Profit (Loss) 3,571,795 6,383,147 19,679,029 8,468,884 (494,892) ------------ ------------ ------------ ------------ ------------ Expenses: Selling, general and administrative 3,348,633 1,931,523 9,797,541 6,028,823 1,673,048 Consulting fees and reimbursements - related party 675,000 790,835 3,537,618 2,111,438 625,000 Provision for doubtful accounts 86,913 1,002,347 1,533,983 2,083,268 -- Depreciation 100,994 35,999 214,299 98,557 6,817 ------------ ------------ ------------ ------------ ------------ 4,211,540 3,760,704 15,083,441 10,322,086 2,304,865 ------------ ------------ ------------ ------------ ------------ Income (Loss) from Operations (639,745) 2,622,443 4,595,588 (1,853,202) (2,799,757) ------------ ------------ ------------ ------------ ------------ Other Income (Expense): Interest expense (215,887) (165,893) (542,280) (497,702) (90,597) Gain on settlement of debts -- -- 324,966 -- -- Other income (expense) (3,922) -- 886 -- -- Loss on debt extinguishment -- -- -- (9,550,700) -- Amortization of purchased intangibles -- -- -- -- (361,434) ------------ ------------ ------------ ------------ ------------ (219,809) (165,893) (216,428) (10,048,402) (452,031) ------------ ------------ ------------ ------------ ------------ Income (Loss) from Continuing Operations (859,554) 2,456,550 4,379,160 (11,901,604) (3,251,788) Gain (Loss) from Discontinued Operations -- -- -- (43,318) 267,190 ------------ ------------ ------------ ------------ ------------ Income (Loss) Before Income Taxes (859,554) 2,456,550 4,379,160 (11,944,922) (2,984,598) Provision for Income Taxes -- 480,000 -- -- -- ------------ ------------ ------------ ------------ ------------ Net Income (Loss) $ (859,554) $ 1,976,550 $ 4,379,160 $(11,944,922) $ (2,984,598) ============ ============ ============ ============ ============ Net Income (Loss) Per Common Share: Basic: Continuing operations $ (0.08) $ 0.19 $ 0.22 $ (1.13) $ (0.42) Discontinued operations -- -- -- -- 0.03 ------------ ------------ ------------ ------------ ------------ Net income (loss) $ (0.08) $ 0.19 $ 0.22 $ (1.13) $ (0.39) ============ ============ ============ ============ ============ Diluted: Continuing operations $ (0.08) $ 0.16 $ 0.16 $ (1.13) $ (0.42) Discontinued operations -- -- -- -- 0.03 ------------ ------------ ------------ ------------ ------------ Net income (loss) $ (0.08) $ 0.16 $ 0.16 $ (1.13) $ (0.39) ============ ============ ============ ============ ============
See notes to consolidated financial statements. F-4 EPIXTAR CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIENCY)
Preferred Stock Common Stock Additional --------------- ------------ Paid-in Accumulated Shares Amount Shares Amount Capital Deficit Total ------ ------ ------ ------ ------- ------- ----- Balance, January 1, 2001 (Restated) -- $ -- 6,000,000 $ 6,000 $ 1,000 $ (328,112) $ (321,112) Year Ended December 31, 2001 (Restated): Issuance of shares in acquisition -- -- 4,500,000 4,500 3,617,376 -- 3,621,876 Distribution in connection with acquisition -- -- -- -- -- (225,000) (225,000) Issuance of shares for services -- -- 3,000 3 13,497 -- 13,500 Net loss -- -- -- -- -- (3,041,826) (3,041,826) ------- ------- ---------- --------- ----------- ------------ ------------ Balance, December 31, 2001 (Restated) -- -- 10,503,000 10,503 3,631,873 (3,594,938) 47,438 Year Ended December 31, 2002 (Restated): Warrants issued in connection with debt extinguishment -- -- -- -- 9,760,000 -- 9,760,000 Net loss -- -- -- -- -- (11,954,922) (11,954,922) ------- ------- ---------- --------- ----------- ------------ ------------ Balance, December 31, 2002 (Restated) -- -- 10,503,000 10,503 13,391,873 (15,549,860) (2,147,484) Year Ended December 31, 2003: Issuance of common stock for services -- -- 13,617 14 84,986 -- 85,000 Issuance of common stock in settlement of liabilities -- -- 127,117 127 444,785 -- 444,912 Issuance of preferred stock, net of offering costs 23,510 24 -- -- 2,136,376 -- 2,136,400 Beneficial conversion feature of convertible debt -- -- -- -- 326,619 -- 326,619 Warrants issued with convertible debt -- -- -- -- 173,381 -- 173,381 Beneficial conversion feature of preferred stock -- -- -- -- 1,884,375 (1,884,375) -- Net income -- -- -- -- -- 4,379,160 4,379,160 ------- ------- ---------- --------- ----------- ------------ ------------ Balance, December 31, 2003 23,510 24 10,643,734 10,644 18,442,395 (13,055,075) 5,397,988 Three Months Ended March 31, 2004 (Unaudited): Issuance of common stock -- -- 33,333 33 8,967 -- 9,000 Net loss -- -- -- -- -- (859,554) (859,554) ------- ------- ---------- --------- ----------- ------------ ------------ Balance, March 31, 2004 (Unaudited) 23,510 $ 24 10,677,067 $ 10,677 $18,451,362 $(13,914,629) $ 4,547,434 ======= ======= ========== ========= =========== ============ ============
See notes to consolidated financial statements. F-5 EPIXTAR CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Months Ended March 31, Year Ended December 31, 2004 2003 2003 2002 2001 ---- ---- ---- ---- ---- Cash Flows from Operating Activities: (Unaudited) (Unaudited) (Restated) (Restated) Net income (loss) $ (859,554) $ 1,976,550 $ 4,379,160 $(11,954,922) $(2,984,598) Adjustments to reconcile net income (loss) to net cash and cash equivalents provided by (used in) operating activities: Depreciation and amortization 100,994 35,999 219,209 140,224 368,251 Provision for bad debt 86,913 1,002,347 1,533,983 2,083,268 -- Loss on debt extinguishment -- -- -- 9,550,700 -- Stock-based compensation 159,375 -- 260,000 -- 13,500 Interest paid with issuance of stock -- -- 40,446 -- -- Amortization of beneficial conversion feature of convertible debenture 81,654 -- 27,218 -- -- Amortization of discount on convertible debenture 43,344 -- 14,448 -- -- Amortization of discount on stockholder loan 26,163 26,163 104,650 -- -- Changes in assets and liabilities: (Increase) decrease in: Accounts receivable 772,996 (1,526,231) (3,281,101) (5,154,083) (716,215) Prepaid expenses and other (85,811) 48,344 (158,740) (58,274) 897 Deferred billing costs 98,423 (123,063) (117,010) (118,746) (35,500) Deposits 23,810 (58,385) (366,611) (42,720) (30,973) Increase (decrease) in: Accounts payable and accrued expenses (174,467) (546,308) (1,304,679) 3,306,330 960,455 Accounts payable - subject to compromise -- -- (385,401) 385,401 -- Deferred revenues (586,152) (1,670,165) (1,438,036) 2,542,692 355,001 Income taxes payable -- 480,000 -- -- -- ----------- ----------- ------------ ------------ ----------- Net cash and cash equivalents (used in) provided by operating activities (312,312) (354,749) (472,464) 679,870 (2,069,182) ----------- ----------- ------------ ------------ ----------- Cash Flows from Investing Activities: Cash paid for acquisition of Phoneboy, net of cash acquired -- -- (8,768) -- -- Acquisition of property and equipment (797,859) (77,384) (1,058,814) (304,062) (102,957) Cash restricted by governmental agency -- -- (416,721) -- -- ----------- ----------- ------------ ------------ ----------- Net cash and cash equivalents used in investing activities (797,859) (77,384) (1,484,303) (304,062) (102,957) ----------- ----------- ------------ ------------ ----------- Cash Flows from Financing Activities: Distribution (acquisition) of goodwill -- -- -- -- (225,000) Proceedsofrom issuance of preferred stock -- -- 2,136,400 -- -- Proceeds from issuance of convertible debenture and warrants -- -- 500,000 -- -- Proceeds from notes payable -- -- -- 624,282 2,424,375 Repayment of notes payable and capital lease obligations (81,489) (22,169) (74,121) (351,299) -- Proceeds from exercise of stock options -- -- 14,000 -- -- ----------- ----------- ------------ ------------ ----------- Net cash and cash equivalents provided by financing activities (81,489) (22,169) 2,576,279 272,983 2,199,375 ----------- ----------- ------------ ------------ ----------- Net Effect of Exchange Rates on Cash (4,512) -- -- -- -- ----------- ----------- ------------ ------------ ----------- Net Increase (Decrease) in Cash and Cash Equivalents (1,196,172) (454,302) 619,512 648,791 27,236 Cash and Cash Equivalents, Beginning 1,342,186 722,674 722,674 73,883 46,647 ----------- ----------- ------------ ------------ ----------- Cash and Cash Equivalents, Ending $ 146,014 $ 268,372 $ 1,342,186 $ 722,674 $ 73,883 =========== =========== ============ ============ =========== Supplemental Disclosures: Cash paid for interest $ 16,743 $ 86,101 $ 355,518 $ 497,702 $ 6,925 =========== =========== ============ ============ =========== Noncash Financing and Investing Activities: Purchase of equipment through capital leases $ 136,250 $ -- $ -- $ -- $ -- =========== =========== ============ ============ ===========
See notes to consolidated financial statements. F-6 EPIXTAR CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001 THREE MONTHS ENDED MARCH 31, 2004 AND 2003 (UNAUDITED) NOTE 1. DESCRIPTION OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES Epixtar Corp. (the "Company") was incorporated in Florida in June 1994. The Company, previously known as Global Asset Holdings ("Global"), changed its name on November 25, 2002. The Company was originally known as Pasta Bella, Inc. and changed to Global in 1997. The Company was originally formed to acquire other entities or businesses. On November 14, 2000, the Company acquired an 80% interest in SavOnCalling.com, LLC ("Savon") held by Transvoice Investment, Ltd. ("Transvoice"). Transvoice's original interest of 51% ownership in Savon increased to 80% on November 14, 2000, pursuant to an acquisition agreement dated May 1, 2000 between Transvoice and Teltran International, Inc. ("Teltran"). Savon was engaged in the marketing and resale of domestic and international telecommunications services. During the year 2001, Savon discontinued its business operations. On August 28, 2002, Savon filed for reorganization under Chapter 11 of the federal bankruptcy code. Teltran held a minority interest of 20% in Savon, until its remaining interest was transferred to the Company as part of the bankruptcy settlement during 2003. On March 31, 2001, the Company acquired all of the outstanding shares of National Online Services, Inc. ("NOL"). Transvoice and a non-related party owned 80% and 20% of the outstanding shares respectively. NOL was incorporated in February 2001 as a provider of subscription based "yellow pages" internet directory services. In July 2003, NOL was merged into a newly formed subsidiary incorporated in Delaware under the same name and continued to provide the same services. On June 1, 2001, the Company formed a wholly owned subsidiary, incorporated in Florida; One World Public Communications, Corp. ("One world"). One World was formed to provide low-rate pay phone service for international calls. In September 2003, the Company formed a new wholly owned subsidiary of the same name, incorporated in Delaware. In January 2004, the Florida Corporation was merged into the surviving Delaware corporation of the same name and purpose. In December 2001, the Company formed two additional subsidiaries; Merchant Internet Services Corp. ("Merchant") and Liberty On-Line Services, Inc. ("Liberty"), formerly Bell America Communications, Corp. Merchant was formed to provide customer care service to customers of NOL. Merchant changed its name to Epixtar Account Services, Inc. ("EAS") in June 2003. Liberty was formed to offer small business solutions such as internet access, web-site design and hosting, and telecommunication services to customers obtained by using direct customer contact ("telemarketing"). In July 2003, EAS and Liberty were merged into two newly formed subsidiaries incorporated in Delaware under the same names and continue to provide the same services and perform the same functions. F-7 EPIXTAR CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) NOTE 1. DESCRIPTION OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (Continued) Additionally, during 2002, the Company formed seven additional wholly owned subsidiaries incorporated in Florida. These subsidiaries provide various internet, telecommunication, and telemarketing services as well as internal management functions. In July 2003, these subsidiaries, were merged into newly formed subsidiaries incorporated in Delaware under the same names and continue to provide the same services and perform the same functions. In August 2002, the Company formed a wholly owned subsidiary, incorporated in Florida, Epixtar Prepaid Communications Corp. ("Prepaid") for the purpose of selling prepaid telephone services. In August 2003, Prepaid was merged into a newly formed subsidiary incorporated in Delaware under the same name and continues to provide the same services and perform the same functions. In October 2003, Prepaid acquired the assets and certain liabilities of Phoneboy Prepaid, Inc., a Florida Corporation, for $10,000 cash and 15,652 restricted shares of the common stock of the Company valued at $90,000. Phoneboy Prepaid, Inc. sold prepaid phonecards through retail outlets throughout the United States. The purchase price was allocated to the fair value of the net assets acquired with the excess of $34,330 assigned to identifiable intangibles (non-compete agreement). The operations of Prepaid are included in the accompanying consolidated financial statements from the date of acquisition. In May 2004, the operations of Prepaid were sold. The Company does not consider the acquisition, the operations or the sale to be significant or material. In February 2003, the Company formed a wholly owned subsidiary, incorporated in Florida, Epixtar Marketing Services Corp. ("Marketing") for the purpose of providing marketing services for its in-house call centers. In August 2003, Marketing was merged into a newly formed subsidiary incorporated in Delaware under the same name and continues to provide the same services and perform the same functions. In June 2003, the Company formed a wholly owned subsidiary, Epixtar Group, Inc. ("Group"). Group was formed to own the Company's four wholly owned internet service providers and EAS. In August 2003, Group was merged into a newly formed subsidiary incorporated in Delaware under the same name and continues to provide the same services and perform the same functions. In January 2004, Group changed its name to NOL Group, Inc. On July 24, 2003, the Company formed a wholly owned subsidiary, Epixtar Philippines IT-Enabled Services Corporation, incorporated in the Philippines. The Company was formed to engage in the business of operating contact centers for the purpose of fielding and managing incoming calls related to customer services, and making and managing outgoing calls for sales, customer service, direct response, back office support, and other similar functions (see Note 19). In 2003, the Company operated primarily in one segment - business solutions which are internet based. In 2004, the Company intends to begin material operations in a second segment - contact center outsourcing services. F-8 EPIXTAR CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) NOTE 1. DESCRIPTION OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (Continued) PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the accounts of Epixtar Corp. (formerly Global Asset Holdings, Inc.), and its wholly-owned subsidiaries; SavOnCalling.com, LLC; NOL Group, Inc.; National Online Services, Inc.; One World Public Communications, Corp.; Epixtar Account Services Corp. (formerly Merchant Internet Services, Inc.); Liberty On-Line Services, Inc.; Ameripages, Inc. (formerly Amerilinc, Inc.); Epixtar Communications Corp.; Epixtar Financial Corp.; Epixtar Management Corp.; Epixtar Solutions, Corp.; Epixtar Prepaid Communications Corporation, Inc.; Epixtar Philippines IT-Enabled Services Corporation; Epixtar Marketing Services Corp.; Epixtar BPO Services Corporation; Epixtar International Contact Center Ltd.; Epixtar Information Technology, Private, Ltd.; Epixtar Direct Response, Corp.; Epixtar Direct Sales Corp.; and B2B Advantage, Inc. (formerly SBA Online, Inc.). All significant intercompany accounts and transactions have been eliminated. REVENUE RECOGNITION National Online Services, Inc., Liberty On-line Services, Inc., B2B Advantage, Inc., and Ameripages, Inc. are providers of subscription based "yellow pages" internet directory services. The Company, through these subsidiaries, provides small businesses with internet access, websites, and e-mail addresses through the resale of dial-up technology. Customers are obtained utilizing outside professional telemarketing call centers and in-house telemarketers. Each sale is evidenced by a recorded acceptance, which is reviewed by a third party quality control provider before the company processes an order. Each customer is entitled to a free thirty-day trial period, during which the customer can cancel the service at no charge. The customers are billed monthly, a predetermined fixed amount, for one month in advance. Revenue is recognized during the period in which services are provided and revenue is deferred for the portion of the advance billings that is attributed to the following accounting period. The amount of deferred revenue is determined by multiplying the advance billing amounts by the percentage of days during the preceding thirty-day service period that occur during the subsequent accounting period. All billing and collecting is done by third party billing services. Collections are remitted on a weekly or monthly basis for billings that occurred approximately sixty to ninety days prior. One World Public Communications Corp. provides low rate long distance international pay phone service. Its revenues in 2003 and 2002 have been minimal. The pay phone operators are billed monthly, based upon actual usage at each pay phone. When a call is initiated, revenues are earned. Revenue is based upon contracts with the pay phone operator at stated rates. Revenues derived from the operations of Phoneboy Prepaid, Inc., which was acquired in October 2003 and disposed of in May 2004, were immaterial to total consolidated revenues. Revenues from contact center operations are recognized as earned, when the services are provided. F-9 EPIXTAR CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) NOTE 1. DESCRIPTION OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (Continued) USE OF ESTIMATES The preparation of the consolidated financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. UNAUDITED FINANCIAL INFORMATION The accompanying financial statements as of March 31, 2004 and for the three months ended March 31, 2004 and 2003 are unaudited. However, in the opinion of management, such financial statements contain all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of financial position, results of operations and cash flows for such periods. Results of interim periods are not necessarily indicative of results to be expected for an entire year. PROPERTY AND EQUIPMENT Property and equipment are recorded at cost. Depreciation is computed principally using the straight-line method for financial reporting purposes and using accelerated methods for income tax purposes. Estimated useful lives for financial reporting purposes range from five to seven years. Expenditures which significantly increase value or extend useful asset lives are capitalized. CASH AND CASH EQUIVALENTS The Company considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents. ADVERTISING EXPENSE The cost of advertising is expensed as incurred. The Company incurred advertising costs of $15,518 (unaudited) and $0 (unaudited) for the quarters ended March 31, 2004 and 2003, respectively. The Company incurred $70,686, $4,744 and $19,419 in advertising costs during 2003, 2002 and 2001, respectively. FAIR VALUE OF FINANCIAL INSTRUMENTS Statement of Financial Accounting Standards ("SFAS") No. 107, "Disclosures About Fair Value of Financial Instruments", requires disclosure of the fair value information, whether or not recognized in the balance sheet, where it is practicable to estimate that value. The amounts reported for cash, accounts receivable, prepaid expenses, loans payable, accounts payable and accrued expenses approximate their fair value because of their short maturities. The amount of the note payable - stockholder has been presented at its estimated fair value (see Note 9). F-10 EPIXTAR CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) NOTE 1. DESCRIPTION OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (Continued) CONCENTRATION OF CREDIT RISK Financial instruments that potentially subject the Company to significant concentrations of credit risk consist primarily of cash and cash equivalents and accounts receivable. The Company's investment policy is to invest in low risk, highly liquid investments. At various times during the year, the Company had cash balances in excess of federally insured limits. The Company maintains its cash balances with high quality financial institutions, which management believes reduces such risk. The Company utilizes the services of outside third-party billing houses. Since the Company's receivables collected by clearing agents are not segregated, there is a concentration risk and possible loss upon the bankruptcy or defalcation of any clearing agent. There is no substantial dependency on any billing house as they are utilized for better cash flow management and compliance issues. Historically, the Company has depended on third-party vendors for its telemarketing and fulfillment operations. Substantially, all of the Company's telemarketing vendors operated their facilities outside the United States. As of December 31, 2003, no third-party telemarketers were being utilized and the Company plans to perform these functions internally for the foreseeable future. STOCK-BASED COMPENSATION The Company has elected to follow Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" (APB No. 25), and related interpretations, in accounting for its employee and board of director stock options rather than the alternative fair value accounting allowed by SFAS No. 123, "Accounting for Stock-Based Compensation". APB No. 25 provides that the compensation expense relative to the Company's employee stock options is measured based on the intrinsic value of the stock option. SFAS No. 123 requires companies that continue to follow APB No. 25 to provide a pro-forma disclosure of the impact of applying the fair value method of SFAS No. 123. The Company follows SFAS No. 123 in accounting for stock options issued to non-employees (see Note 18). EARNINGS (LOSS) PER SHARE The Company has adopted SFAS Statement No. 128, "Earnings per Share". The statement establishes standards for computing and presenting earnings per share (EPS). It requires dual presentation of basic and diluted EPS on the face of the income statement. There is no presentation of diluted loss per share in 2002 as the effect of common stock options, warrants and convertible debt amounts were antidilutive. Note 18 discusses the computation of earnings (loss) per common share. Notes 6 discusses the issuance of warrants issued as consideration for debt restructuring, compensation for consulting services, in connection with the issuance of preferred stock, and in relation to the issuance of convertible debt. Note 11 discusses options issued through the Company's incentive stock option plan. F-11 EPIXTAR CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) NOTE 1. DESCRIPTION OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (Continued) GOODWILL Goodwill represents the excess acquisition cost over the fair value of the tangible and identified intangible net assets of the NOL acquisition in 2001. Goodwill was being amortized over an estimated useful life of five years. In accordance with SFAS No. 142 "Goodwill and Other Intangible Assets", the Company no longer amortizes goodwill, but reviews goodwill for impairment. SFAS No. 142 requires the Company to compare the fair value of goodwill to the carrying amount and determine if impairment occurred. Impairment occurs when the fair value of the goodwill is lower than the carrying value. For the year ended December 31, 2002, fair value was determined by an outside valuation based on discounted cash flows, market multiples or appraisal value as appropriate. For the year ended December 31, 2003, the Company determined the fair value by applying the valuation methods utilized for the year ended December 31, 2002. For the years ended December 31, 2003 and 2002, there was no impairment. INTANGIBLE ASSETS The Company's intangible assets consist of a non-competition agreement entered into as part of the acquisition of Phoneboy Prepaid, Inc. (see above). The non-competition agreement is stated on the basis of cost and is amortized on a straight-line basis over two years (see Note 7). There were no intangibles with indefinite lives as of December 31, 2003 or 2002. Intangible assets are included in "Deposits and Other" in the accompanying consolidated financial statements. INCOME TAXES The Company accounts for income taxes under SFAS No. 109, "Accounting for Income Taxes". SFAS No. 109 requires an asset and liability approach for financial reporting for income taxes. Under SFAS No. 109, deferred taxes are provided for temporary differences between the carrying values of assets and liabilities for financial reporting and tax purposes at the enacted rates at which these differences are expected to reverse. DISCONTINUED OPERATIONS In March 2001, the Company discontinued the operations of Savon. In 2002, Savon had no operations, sales or other significant transactions. F-12 EPIXTAR CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) NOTE 1. DESCRIPTION OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (Continued) BUSINESS SEGMENTS SFAS No. 131, "Disclosures About Segments of an Enterprise and Related Information", establishes standards for the way that public companies report information about operating segments in annual financial statements and requires reporting of selected information about operating segments in interim financial statements regarding products and services, geographic areas, and major customers. SFAS No. 131 defines operating segments as components of a company about which separate financial information is available that is evaluated regularly by the chief operating decision maker in deciding how to allocate resources and in assessing performance. The acquisition of Phoneboy Prepaid, Inc. (see above) does not meet the criteria of a reportable segment under SFAS 131 and, therefore, the Company determined that it operated in only one segment until first quarter 2004 at which time it began contact center operations. RECENT ACCOUNTING PRONOUNCEMENTS In 2002, the Company adopted the disclosure provisions of SFAS No. 148, "Accounting for Stock-Based Compensation - Transition and Disclosure (an amendment to FASB Statement No. 123)." SFAS No. 148 amends the disclosure requirements of SFAS No. 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. In January 2003, the FASB issued FASB Interpretation No. 46, "Consolidation of Variable Interest Entities, an Interpretation of Accounting Research Bulletin No. 51." In December 2003, the FASB issued FIN No. 46R, which clarified certain issues identified in FIN 46. FIN 46R requires an entity to consolidate a variable interest entity if it is designated as the primary beneficiary of that entity even if the entity does not have a majority of voting interests. A variable interest entity is generally defined as an entity where its equity is unable to finance its activities or where the owners of the entity lack the risk and rewards of ownership. The provisions of this statement apply at inception for any entity created after January 31, 2003. For an entity created before February 1, 2003, the provisions of this interpretation must be applied at the beginning of the first interim or annual period beginning after March 1, 2004. The Company does not have any interest in variable interest entities and therefore the adoption of this standard is not expected to have an impact on the Company's financial position and results of operations. In April 2003, the Financial Accounting Standards Board ("FASB") issued SFAS No. 149, "Amendment of Statement 133 on Derivative Instruments and Hedging Activities." SFAS No. 149 amends and clarifies the accounting for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities under SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." SFAS No. 149 is generally effective for contracts entered into or modified after June 30, 2003 and for hedging relationships designated after June 30, 2003. The adoption of SFAS No. 149 did not have any impact on the Company's financial position, results of operations or cash flows. F-13 EPIXTAR CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) NOTE 1. DESCRIPTION OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (Continued) RECENT ACCOUNTING PRONOUNCEMENTS (Continued) In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity." SFAS No. 150 requires that certain financial instruments, which under previous guidance were recorded as equity, be recorded as liabilities. The financial instruments affected include mandatorily redeemable stock, certain financial instruments that require or may require the issuer to buy back some of its shares in exchange for cash or other assets, and certain obligations that can be settled with shares of stock. The Company adopted SFAS No. 150 on June 1, 2003. The adoption of this statement did not have any effect on the Company's financial position, results of operations or cash flows. In November 2002, the Financial Accounting Standards Board issued Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others," an interpretation of SFAS No. 5, 57, and 107 and rescission of SFAS Interpretation No. 34. This statement addresses the disclosures to be made by a guarantor in its interim and annual financial statements about its obligations under guarantees. This interpretation also clarifies the requirements related to the recognition of a liability by a guarantor at the inception of a guarantee for the obligations the guarantor has undertaken in issuing that guarantee. The adoption of this statement did not have a significant impact on the Company's financial position or results of operations. NOTE 2. RESTATEMENT OF PRIOR CONSOLIDATED FINANCIAL STATEMENTS The prior consolidated financial statements of the Company have been restated as a result of management re-evaluating the accounting treatment of three previously recorded transactions. Those transactions are as follows: SAVON LLC ACQUISITION In November 2000, the Company exchanged 2,000,000 shares of Company common stock for 80% of the outstanding member interests of Savon LLC. Transvoice Investments Ltd., the seller, received 33% of the outstanding common stock of the Company through this acquisition. Pursuant to SEC Staff Accounting Bulletin No. 48, this acquisition should have been recorded at historical cost of Savon because of the significance of the ownership interest that the Transvoice stockholder interests had following this acquisition. However, the Company recorded the transaction at the fair value of the Company common stock exchanged for the interest and, as a result, goodwill was recorded in connection with this acquisition which should not have been recorded. The Company has restated the prior consolidated financial statements to record this acquisition at historical cost of Savon at the date of purchase and, consequently, removed all goodwill, goodwill amortization and impairment charges previously recorded relating to this transaction. F-14 EPIXTAR CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) NOTE 2. RESTATEMENT OF PRIOR CONSOLIDATED FINANCIAL STATEMENTS (Continued) NATIONAL ON LINE ACQUISITION On March 31, 2001, the Company acquired 100% of the outstanding equity interests of National On Line, in a transaction involving two payments, for a total of 4,500,000 shares of Company common stock. Due to the fact that Transvoice Investments Ltd. owned 80% of National On Line prior to the acquisition and 56% of the outstanding Company common stock following the acquisition, the purchase of the 80% interest should have been recorded at historical cost of National On Line, pursuant to the guidelines of SEC Staff Accounting Bulletin No. 48. Rather than record the 20% interest at fair value and the 80% interest at historical cost, the Company recorded the entire acquisition at the fair value of the 4,500,000 shares of Company common stock exchanged. As a result, goodwill was recorded in connection with the purchase of the 80% which should not have been recorded. The Company has restated the prior consolidated financial statements to reflect the acquisition of the 80% interest at historical cost of National On Line at the date of purchase and, consequently, removed the goodwill and goodwill amortization related thereto. LOSS ON EXTINGUISHMENT OF DEBT On October 31, 2001, the Company entered into a loan agreement to borrow up to $5,000,000 from a then unrelated entity. The note provided for interest at 7%, was collateralized by accounts receivable and was due on demand. In August and September 2002, the creditor became a stockholder of the Company when the entity acquired a total of 770,000 common shares. In November 2002, the Company entered into an agreement, which was executed on December 6, 2002 and amended on March 3, 2003, whereby the creditor released the collateral and agreed not to demand payment before January 2005 in exchange for certain consideration. That consideration consisted of warrants to purchase 4,000,000 shares of Company common stock at an exercise price of $.50 per share for a term of three years beginning in May 2003. Pursuant to EITF 96-19, management has determined that the transaction should have been treated as an extinguishment of the original instrument and an execution of a new note at December 6, 2002. The fair value of the warrants, determined on the grant date (March 3, 2003), should have been treated as a component of the calculation of the loss associated with that extinguishment and should have been recognized in the statement of operations in December 2002. In addition, the new note should have been recorded at fair value on the date that it was entered into (December 6, 2002). In 2002, the Company recorded the fair value of the warrants at the date the agreement was negotiated (November 2002) as deferred financing costs and began amortizing those costs over the new life of the loan (two years). The 2002 consolidated financial statements have been restated to reflect the loss on debt extinguishment in 2002, measured by the fair value of the warrants on the date of grant, reduced by the discount on the note required to reflect that note at fair value at the date it was executed. The discount is being amortized over the life of the new note, approximately two years. The fair value of both the warrants and the note payable was determined by appraisal. F-15 EPIXTAR CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) NOTE 2. RESTATEMENT OF PRIOR CONSOLIDATED FINANCIAL STATEMENTS (Continued) SUMMARY As a result of the transactions described above, the previously reported net loss for the year ended December 31, 2002 has increased by approximately $9,509,000 to approximately $11,955,000. Net loss per share as previously reported for 2002 ($.23) was restated to a net loss per share of $(1.13). In addition, stockholders' equity as of December 31, 2002 of approximately $12,043,000 as previously reported was reduced to a stockholders' deficiency of approximately $2,147,000. The previously reported net loss for the year ended December 31, 2001 has decreased by approximately $13,534,000 to approximately $2,985,000. Net loss per share for 2001 as previously reported ($2.13) was restated to net loss per share of $(0.39). In addition, stockholders' equity as of December 31, 2001 of approximately $13,489,000 has been reduced to approximately $47,400. The restated balance sheet as of December 31, 2002 is as follows:
As Previously Reported Adjustments Restated -------- ----------- -------- ASSETS Debt restructuring costs - current portion $ 500,000 $ (500,000) $ -- Other current assets 4,739,186 4,739,186 Property and equipment, net 406,971 -- 406,971 Debt restructuring costs - non-current portion 458,333 (458,333) -- Goodwill 16,801,359 (13,441,087) 3,360,272 Other Assets 76,716 -- 76,716 ----------- ------------ ------------ Total assets $22,982,565 $(14,399,420) $ 8,583,145 =========== ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities $ 8,377,478 $ -- $ 8,377,478 ----------- ------------ ------------ Long-Term Debt: Capital lease obligation 88,451 -- 88,451 Note payable 2,474,000 (209,300) 2,264,700 ----------- ------------ ------------ Total long-term debt 2,562,451 (209,300) 2,353,151 ----------- ------------ ------------ Stockholders' Equity (Deficiency): Common stock 10,503 -- 10,503 Additional paid-in capital 31,757,997 (18,366,124) 13,391,873 Accumulated deficit (19,725,864) 4,176,004 (15,549,860) ---------- ------------ ------------ Total stockholders' equity (deficiency) 12,042,636 (14,190,120) (2,147,484) ---------- ------------ ------------ Total liabilities and stockholders' equity (deficiency) $22,982,565 $(14,399,420) $ 8,583,145 =========== ============ ============
F-16 EPIXTAR CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) NOTE 2. RESTATEMENT OF CONSOLIDATED FINANCIAL STATEMENTS (Continued) SUMMARY (Continued) The restated statement of operations for the year ended December 31, 2002 is as follows:
As Previously Reported Adjustments Restated -------- ----------- -------- Revenues $26,250,851 $ -- $ 26,250,851 Cost of sales 17,781,967 -- 17,781,967 ---------- ------------ ----------- Gross profit 8,468,884 8,468,884 Selling, general and administrative 10,332,086 -- 10,332,086 ----------- ------------ ------------ Loss from operations (1,863,202) -- (1,863,202) Other (expense): Interest expense (539,369) 41,667 (497,702) Loss on debt extinguishment -- (9,550,700) (9,550,700) ----------- ------------ ------------ Loss from continuing operations (2,402,571) (9,509,033) (11,911,604) Loss from discontinued operations (43,318) - (43,318) ----------- ------------ ------------ Net Loss $(2,445,889) $ (9,509,033) $(11,954,922) =========== ============ ============ Net Loss Per Common Share Basic and Diluted: Continuing operations $ (0.23) $ (0.91) $ (1.13) Discontinued operations (0.00) (0.00) (0.00) ----------- ------------ ------------ Net loss (0.23) (0.91) (1.13) =========== ============ ============ Weighted Average Number of Common Shares Outstanding 10,503,000 -- 10,503,000 =========== ============ ============ The restated balance sheet as of December 31, 2001 is as follows: As Previously Reported Adjustments Restated -------- ----------- -------- ASSETS Total current assets $ 842,560 $ -- $ 842,560 Property and equipment, net 201,466 -- 201,466 Goodwill 16,801,359 (13,441,087) 3,360,272 Other Assets 33,996 -- 33,996 ----------- ------------ ------------ Total assets $17,879,381 $(13,441,087) $ 4,438,294 =========== ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities $ 4,338,130 $ -- $ 4,338,130 ----------- ------------ ------------ Total Long-Term Debt 52,726 -- 52,726 ----------- ------------ ------------ Stockholders' Equity Common stock 10,503 -- 10,503 Additional paid-in capital 30,757,997 (27,126,124) 3,631,873 Accumulated deficit (17,279,975) 13,685,037 (3,594,938) ----------- ------------ ------------ Total stockholders' equity 13,488,525 (13,441,087) 47,438 ----------- ------------ ------------ Total liabilities and stockholders' equity $17,879,381 $(13,441,087) $ 4,438,294 =========== ============ ============
F-17 EPIXTAR CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) NOTE 2. RESTATEMENT OF CONSOLIDATED FINANCIAL STATEMENTS (Continued) SUMMARY (Continued) The restated statement of operations for the year ended December 31, 2001 is as follows:
As Previously Reported Adjustments Restated -------- ----------- -------- Revenues $ 1,189,723 $ -- $ 1,189,723 Cost of sales 1,684,615 -- 1,684,615 ------------ ------------ ------------ Gross profit (loss) (494,892) -- (494,892) Selling, general and administrative 2,298,048 -- 2,298,048 ------------ ------------ ------------ Loss from operations (2,792,940) -- (2,792,940) ------------ ------------ ------------ Other (expense): Interest expense 90,597 -- 90,597 Loss on debt extinguishment 6,817 -- 6,817 Amortization of purchased intangibles 1,950,241 (1,588,807) 361,434 ------------ ------------ ------------ (2,047,655) (1,588,807) (458,848) ------------ ------------ ------------ Loss from continuing operations (4,840,595) 1,588,807 (3,251,788) Income (loss) from discontinued operations (11,678,492) 11,945,682 267,190 ------------ ------------ ------------ Net Loss $(16,519,087) $ 13,534,489 $ (2,984,598) ============ ============ ============ Net Loss Per Common Share Basic and Diluted: Continuing operations $ (0.62) $ 0.20 $ (0.42) Discontinued operations (1.51) $ 1.54 0.03 ------------ ------------ Net loss $ (2.13) $ 1.74 $ (0.39) ============ ============ ============ Weighted Average Number of Common Shares Outstanding 7,758,693 7,758,693 ============ ============
NOTE 3. PROFITABILITY AND LIQUIDITY At December 31, 2003, the Company reflected an accumulated deficit of approximately $13,000,000 as a result of net losses in each year of operation except 2003. In the first quarter of 2003 the Company began to report profitable operations. However, cash flows from operations for the year ended December 31, 2003 were negative. In the quarter ended March 31, 2004, the Company reported a net loss of approximately $860,000. The Company continues to experience certain liquidity issues. In October 2003, the Federal Trade Commission ("FTC") served a complaint in which the FTC alleged that the Company and certain subsidiaries were misleading potential customers of the internet service business. Specifically, the FTC alleged that the Company was signing customers for a free thirty day trial period without appropriate consent and was failing to inform those customers that unless the service was cancelled before the end of the thirty day trial period the customer would be billed for the service in future periods. At the same time it served the complaint, the Court issued a temporary restraining order, asset freeze, order permitting expedited discovery, order appointing a temporary receiver and an order to show cause in an action commenced by the FTC. In November 2003, without any finding of wrongdoing, the Company agreed in principle to enter into a preliminary injunction with the FTC. As a result, the Company was allowed to resume business and the asset freeze was lifted. As part of the agreement, the Company was required to establish an escrow account for the payment of future customer refunds and other amounts subject to future resolution of the dispute with the FTC, into which approximately $1,702,000 was deposited. As of December 31, 2003, the amount held in escrow was approximately $856,000. During 2003, the Company paid $75,000 in fees and fines and received released funds of approximately $772,000 from the escrow funds. In addition, the Company can not utilize approximately $417,000 of cash held in Philippine and U.S. bank accounts until they receive approval by the FTC. As a result, this cash is reflected as restricted in the accompanying balance sheet. The action by the FTC, and the Company's resulting defense against such action, caused the Company to experience business interruption and incur substantial costs. Commencing on October 30, 2003, the Company was unable to market its internet product and has not yet returned to marketing at a level equivalent to that before the injunction. All of this has had a significant negative impact on the financial position and results of operations of the Company which has not yet been fully measured. Also, although the Company believes that it is operating within the current laws and regulations, there can be no assurance that there will be no further action by the FTC or any other governmental agency in the future. F-18 EPIXTAR CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) NOTE 3. PROFITABILITY AND LIQUIDITY (Continued) In part as a result of the actions of the FTC, the Company decided to expedite the implementation of a business plan previously developed, which involves moving into an additional business segment. The Company intends to sell outsourcing services to customers through call centers which the Company will own and/or operate. This business plan calls for the Company to acquire or establish call center operations in foreign countries. This business expansion will require substantial working capital commitments on the part of the Company. In addition, the Company currently operates an internet based business which could be subject to technological obsolescence in the future. While the Company intends to continue to operate the internet provider service business, the Company also intends to expend significant resources developing the previously described call center operations. As a result, there may not be sufficient resources available to allow the internet provider service business to maintain or increase its customer base. In order to maintain profitability, the Company needs to be able to retain customers in the internet provider service segment as well as develop customers in the call center segment. Management believes that the steps it is taking to implement the new business plan will allow the Company to maintain profitability. These steps include: o hire additional management personnel with call center experience o enter into preliminary agreements to acquire call center assets in the Philippines o enter into a lease in Manila for space to be developed as a call center o enter into agreements for outsourcing services o prepare a private placement offering for debt or equity funding (see Note 22) o renegotiate the maturity date of debt instrument (see Note 9) F-19 EPIXTAR CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) NOTE 3. PROFITABILITY AND LIQUIDITY (Continued) Although management believes that the actions currently being taken provide the opportunity for the Company to maintain profitability and liquidity, there can be no assurances that management's plans will be achieved. NOTE 4. ACCOUNTS RECEIVABLE
March 31, December 31, 2004 2003 2002 ---- ---- ---- (Unaudited) (Restated) Accounts receivable - gross $3,718,618 $3,424,963 $2,018,256 Holdbacks and reserves 6,262,317 5,733,290 4,285,564 Unbilled receivables 48,572 114,834 420,763 ----------- ---------- ---------- 10,029,507 9,273,087 6,724,583 Allowance for doubtful accounts (2,238,030) (2,178,035) (2,132,371) Estimated settlement liabilities (1,902,021) (1,485,377) (789,886) Due to factors and reserve (1,139,688) -- -- ----------- ---------- ---------- Accounts receivable - net $ 4,749,768 $5,609,675 $3,802,326 =========== ========== ==========
The Company's accounts receivable include the determined collectible portion of receivables based upon reconciliation with the outside billing services and local exchange carriers (LEC). Additionally, as is common business practice in the telecommunications industry, the billing services remit collections reduced by a "holdback or reserve". The holdback or reserve represents anticipated uncollectible billings, disputed billings or adjustments to a customer's account and are included in accounts receivable net of an allowance for collectibility. While holdbacks and reserves are expected to be collected, the Company has established an allowance of approximately fifty percent of such amounts as of March 31, 2004 (unaudited) and December 31, 2003 and 2002. The Company writes off accounts considered uncollectible against the allowance upon notification from the billing companies that amounts are uncollectible. Additionally, based upon notification from the billing companies, the Company recorded $1,485,377 and $789,886 at December 31, 2003 and 2002, respectively, in anticipated adjustments due the billing companies as future settlements. Unbilled receivables represents amounts billed subsequently for services provided in the current period. The Company's accounts receivables serve as collateral for certain debt of the Company (see Note 8). FACTORING AGREEMENTS In April 2003, a subsidiary of the Company entered into a factoring and security agreement with a non-related party. Under the terms of the agreement, a maximum of $2,000,000 of accounts receivable can be factored at a 50% advance rate for an initial discount fee of 1.25% of the purchased receivable. For accounts receivables uncollected after 30 days, the Company is charged an additional 0.625% for every 15 day period up to 90 days. Thereafter, for the next two 15-day periods, the Company is charged an additional 0.75%. Accounts receivable are also factored through a billing company under similar terms with a maximum advance of $500,000. The total amount of factored accounts receivable was $1,100,752 as of December 31, 2003. Factoring charges during 2003 amounted to $311,346. Accounts receivable are presented net of factored amounts. F-20 EPIXTAR CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) NOTE 4. ACCOUNTS RECEIVABLE (Continued) DEFERRED REVENUE The Company's customers are billed on a thirty day cycle. Deferred revenue represents the pro-rata portion of billings to customers that have not been earned. Customers are billed monthly for one month in advance. The amount of deferred revenue is determined by multiplying the advance billing amounts by the percentage of days during the preceding thirty-day service period that occur during the subsequent accounting period. NOTE 5. DEFERRED BILLING COSTS The Company's billing costs consist of transaction charges from its third party billing companies and LEC's. Billing costs are deducted by the billing companies in advance by reducing amounts collected on the Company's behalf before remitting the net amount. Since the Company bills its customers one month in advance, a portion of the billing costs deducted from remittances from the billing companies relate to transaction charges for revenues that are deferred (see Note 11). The amount of deferred billing costs is determined by multiplying the advance billing amounts by the percentage of days during the preceding thirty-day service period that occur during the subsequent accounting period. NOTE 6. PROPERTY AND EQUIPMENT
Estimated March 31, December 31, Useful Lives 2004 2003 2002 ------------ ---- ---- ---- (Unaudited) Equipment 5-7 years 1,515,070 $1,012,682 $353,284 Software 3 Years 200,000 200,000 -- Furniture and fixtures 7 years 347,550 241,193 141,434 Leasehold improvements 5 years 481,367 129,583 17,628 ---------- ---------- -------- 2,543,987 1,583,458 512,346 Less: accumulated depreciation and amortization (420,481) (319,614) (105,375) ---------- ---------- -------- $2,123,506 $1,263,844 $406,971 ========== ========== ========
Depreciation expense was $214,299 and $98,557 for the years ended December 31, 2003 and 2002, respectively, and $100,867 (unaudited) for the three months ended March 31, 2004. F-21 EPIXTAR CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) NOTE 7. INTANGIBLE ASSETS
March 31, December 31, 2004 2003 ---- ---- (Unaudited) Balance of non-competition agreement: Gross $39,237 $39,237 Accumulated amortization 9,814 4,907 ------- -------- Net balance $29,426 $34,330 ====== ======
The Company had no amortizable intangible assets at December 31, 2002. Amortization expense for intangible assets was $4,907 for the year ended December 31, 2003 and $4,907 (unaudited) for the three months ended March 31, 2004. Estimated amortization expense for the succeeding years ending December 31 is as follows: 2004 $19,619 2005 14,711
NOTE 8. DEBT
March 31, December 31, 2004 2003 2002 ---- ---- ---- (Unaudited) In July 2002, National Online Services, Inc. issued notes to two telemarketing vendors in the amounts of $302,532 and $101,934. The notes were payable in one year, bearing interest at 10% per annum and were given in settlement of outstanding accounts payable balances. The notes were satisfied with the issuance of stock in 2003. $ -- $404,466 In October 2003, the Company acquired the assets and certain liabilities of Phone Prepaid, Inc., which included a revolving line of credit in the amount of $10,000 bearing annual interest at 3.25% above prime. The prime rate was 4.00% on December 31, 2003. The line of credit expires in December 2005. 9,800 9,800 --
F-22 EPIXTAR CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) NOTE 8. DEBT (Continued)
March 31, December 31, 2004 2003 2002 ---- ---- ---- (Unaudited) In December 2003, the Company issued a convertible debenture in the amount of $500,000 to unrelated parties. The debenture accrues interest at 7% annually and matures in December 2004. The outstanding principal and interest on the debenture is convertible at any time into shares of the Company's common stock. On the date of the issuance of the convertible debenture, Company's common stock had a closing price per share on the Over-the Counter Bulletin Board of $5.15. Based on the terms of the conversion associated with the debenture, there was an intrinsic value associated with the beneficial conversion feature estimated at $326,619, which was recorded as deferred interest and presented as a discount on the convertible debenture, net of amortization to be taken over the one-year term of the debenture. Also, as part of the convertible debenture, the company issued detachable warrants to purchase 62,500 shares of the Company's common stock for $5.00 per share exercisable at any time over a five year period from the date of issuance. Using the Black-Scholes model the Company estimated the fair value of the warrants and allocated $173,381 of the proceeds from the debenture to the warrants which was recorded as deferred interest and presented as a discount on the convertible debenture, net of amortization to be taken over the one-year term of the debenture. The note is collateralized by the Company's accounts receivables. 166,667 41,666 -- The Company leases certain equipment under capitalized leases with monthly payments ranging from $120 to $3,300 and interest ranging from 7% to 14% annually. The leases expire in years ranging from 2004 to 2006. Minimum future lease payments total $151,706, consisting of $85,162 in 2004, $53,331 in 2005, and $13,213 in 2006. $2,862 of the minimum future lease payments represents interest. 148,408 93,650 167,771 --------- --------- --------- 324,875 145,116 572,237 Less current portion (274,844) 121,513 483,786 --------- --------- --------- $ 50,031 $ 23,603 $ 88,451 ========= ========= =========
F-23 EPIXTAR CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) NOTE 8. DEBT Annual maturities of long-term debt are as follows: For the years ending December 31, 2004 $579,847 2005 17,828 2006 5,775 -------- Total payments due 603,450 Less unamortized discount (458,334) -------- $145,116 ======== NOTE 9. NOTE PAYABLE - STOCKHOLDER On October 31, 2001, the Company entered into a loan agreement to borrow up to $5,000,000 from a then unrelated entity. In August 2002, the creditor became a stockholder of the Company. The note provided for interest at 7%, was collateralized by accounts receivable and was due on demand. In November 2002, the Company entered into an agreement, which was executed on December 6, 2002 and amended on March 3, 2003, whereby the creditor released the collateral and agreed not to demand payment before January 2005 in exchange for certain consideration. That consideration consisted of warrants to purchase 4,000,000 shares of Company common stock at an exercise price of $.50 per share for a term of three years beginning in May 2003. Pursuant to EITF 96-19, management accounted for this transaction as an extinguishment of the original instrument and an execution of a new note at December 6, 2002. The fair value of the warrants was recorded as a component of the calculation of the loss associated with that extinguishment. The new note was recorded at fair value on the date that it was entered into (December 6, 2002). The resulting discount on the note is being amortized over the life of the new note, approximately two years. The fair value of both the warrants and the note payable was determined by appraisal. As part of the agreement, the creditor also agreed to release its security interest in the Company's accounts receivable to the extent required to secure additional debt financing. Except for the demand deferral and the release of the security interest, all other terms of the note stayed in effect. The outstanding principal balance was $2,369,350 and $2,264,700 as of December 31, 2003 and 2002, respectively. Interest of $255,334 was paid in July 2003. NOTE 10. ACCOUNTS PAYABLE - SUBJECT TO COMPROMISE As discussed in Note 1, 2 and 17, the Company's subsidiary, Savon, filed for bankruptcy protection under Chapter 11. At the time of filing, Savon had $385,401 in liabilities of which $351,263 was due to its telecommunications carrier and related to a lawsuit initiated by the carrier. Pre-petition liabilities are required to be segregated from post-petition liabilities. Upon completion of a plan of reorganization as part of Chapter 11 or change in bankruptcy status, liabilities subject to compromise are adjusted. During 2003, a bankruptcy settlement was reached, resulting in a forgiveness of the liabilities amounting to $324,966. F-24 EPIXTAR CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) NOTE 11. NON-CASH INVESTING AND FINANCING ACTIVITIES During 2003, the Company issued warrants to purchase 329,140 shares of common stock at an exercise price of $7.87 per share, exercisable over five years, relating to the issuance of preferred stock (see Note 13). Based upon the Black-Scholes option price calculation, the value of each warrant was $6.63 and the transaction was valued at $2,183,157, which was accounted for as offering costs, resulting in offsetting charges to additional paid-in capital. In August 2003, the Company entered into a consulting agreement, providing for the issuance of 50,000 shares of common stock as compensation for services valued at $175,000 as specified in the agreement. The total amount was charged to expense during 2003. As of December 31, 2003, these shares have not been issued and as a result, are included in common stock to be issued in the accompanying balance sheet. In September 2003, the Company issued 127,117 shares of common stock in settlement of debt and accrued interest totaling $404,506 and $40,406, respectively. The shares were valued based upon the outstanding amounts related to the loan and were accounted for as a reduction in debt and a charge to accrued interest. In October 2003, the Company issued 13,617 shares of common stock as compensation for consulting services valued at $85,000. The shares were valued based upon the value of services provided as provided for in the agreement. The total amount was charged to expense during 2003. In October 2003, the Company issued 15,652 shares of common stock as consideration valued at $90,000 related to the acquisition of the net assets of Phoneboy Prepaid, Inc. (see Note 1). The shares were valued based upon the terms of the purchase agreement and recorded in accordance with the allocation of the purchase price to the assets and certain liabilities as specified in the purchase agreement with the excess of the total purchase price over the net assets purchased allocated to the non-compete agreement included in the purchase agreement. The non-compete agreement is included in "Deposits and other" in the "Other assets" section of the balance sheet. As of December 31, 2003, these shares have not been issued and as a result, are included in common stock to be issued in the accompanying balance sheet. In December 2003, the Company issued convertible debt, convertible into shares of the Company's common stock at a conversion rate as defined. Purchasers of the convertible debt also received warrants to purchase 62,500 shares of the Company's common stock at an exercise price of $5.00 per share, exercisable over five years. The accounting treatment of the beneficial conversion feature and the detachable warrants resulted in $495,834 of discounts against the debt, net of amortization of $41,666, which was charged to interest expense in 2003 (see Note 8). F-25 EPIXTAR CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) NOTE 12. INCOME TAXES The components of the Company's provision (benefit) for income taxes are as follows:
March 31, December 31, 2004 2003 2003 2002 2001 ---- ---- ---- ---- ---- (Unaudited) (Unaudited) (Restated) (Restated) Current: Federal $ -- $ 406,000 $ -- $ -- $ -- State -- 74,000 -- -- -- ---------- ----------- ------------ ------------ ----------- -- 480,000 -- -- -- ---------- ----------- ------------ ------------ ----------- Deferred: Federal -- -- -- -- -- State -- -- -- -- -- ---------- ----------- ------------ ------------ ----------- -- -- -- -- -- ---------- ----------- ------------ ------------ ----------- $ -- $ 480,000 $ -- $ -- $ -- ========== =========== ============ ============ ===========
A reconciliation of income tax computed at the statutory federal rate to income tax expense (benefit) is as follows:
March 31, December 31, 2004 2003 2003 2002 2001 ---- ---- ---- ---- ---- (Unaudited) (Unaudited) (Restated) (Restated) Tax provision at the statutory rate of 35% $(300,844) $ 859,800 $ 1,532,600 $ (4,184,223) $(1,044,609) State income taxes, net of federal income tax (19,396) 95,500 175,730 (443,194) (102,011) Change in valuation allowance 193,465 (476,500) (1,752,797) 4,638,135 1,017,498 Permanent items 126,775 1,200 44,467 11,093 129,122 Other -- -- -- (21,811) -- ---------- ----------- ------------ ------------ ----------- $ -- $ 480,000 $ -- $ -- $ -- ========== =========== ============ ============ ===========
The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities are presented below.
March 31, December 31, 2004 2003 2002 ---- ---- ---- (Unaudited) (Restated) ----------- Deferred tax assets: Net operating loss carryforward $2,164,688 $1,548,735 $1,418,369 Deferred financings costs 1,337,480 1,783,307 3,566,613 Allowance for doubtful accounts 870,594 847,256 829,492 ---------- --------- --------- Total gross deferred tax assets 4,372,762 4,179,298 5,814,474 Less valuation allowance (4,255,142) (4,061,678) (5,814,474) --------- --------- --------- Total net deferred tax assets 117,620 117,620 -
F-26 EPIXTAR CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) NOTE 12. INCOME TAXES (Continued)
March 31, December 31, 2004 2003 2002 ---- ---- ---- (Unaudited) (Restated) Deferred tax liabilities: Depreciation on fixed assets (117,620) ( 117,620) -- ----------- --------- ---------- Net deferred tax asset $ -- $ -- $ -- =========== ========== ==========
Because of the historical earnings history of the Company, the net deferred tax assets have been fully offset by a 100% valuation allowance. The valuation allowance for the net deferred tax assets was approximately $4.1 million and $5.8 million as of December 31, 2003 and 2002, respectively. In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income and tax planning strategies in making this assessment. At December 31, 2003 and 2002, the Company had net operating loss carryforwards available for US tax purposes of approximately $3.9 million and $3.6 million respectively. These carryforwards expire through 2023. Under Section 382 of the Internal Revenue Code of 1986, as amended (the "Code"), the utilization of net operating loss carryforwards is limited under the change in stock ownership rules of the Code. As a result of ownership changes, which occurred in June 2002, the Company's operating tax loss carryforwards are subject to these limitations. Future ownership changes could also further limit the utilization of any net operating loss carryforwards as of that date. NOTE 13 CONVERTIBLE PREFERRED STOCK During 2003, the Company issued 23,510 shares of Series A Convertible Preferred Stock and warrants to 16 investors for aggregate consideration of $2,351,000. Each share of Preferred Stock has a par value of $.001 and is convertible into shares of the Company's common stock at an initial conversion price of $3.50. However, the terms of the sale stated that, should the Company's net income for the year ended December 31, 2003 not exceed $5,000,000, the conversion price would be adjusted to $2.00 per share. Accordingly, the conversion price in effect as of December 31, 2003 was $2.00 per share. Additionally, the conversion price will be adjusted based upon the company's net income in 2004 to $2.00 if the net income is less than $10,000,000, $3.00 if net income is between $10,000,000 and $12,500,001, and $3.50 if net income exceeds $12,500,000. The shares are to be automatically converted, at the then effective conversion price, in the event of an offering in which the Company's common shares are listed on the New York or American Stock Exchange or quoted on NASDAQ, or any combination thereof; the minimum gross proceeds from such offering is at least $50,000,000; and the offering price of such offering is at least $10.00 per share. The shares are also subject to automatic conversion at the election of the holders of a majority of the preferred shares. The conversion price is also subject to anti-dilution adjustments as set forth in the purchase agreement. F-27 EPIXTAR CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) NOTE 13. CONVERTIBLE PREFERRED STOCK (Continued) Based on the terms of the conversion associated with the preferred stock, there was an intrinsic value associated with the beneficial conversion feature estimated at $1,884,375, which was recorded as a dividend and therefore as a reduction of retained earnings. Additionally, each purchaser of the Preferred stock received, for each share of preferred stock purchased, one warrant to purchase 14 shares of the company's common shares at an exercise price of $7.87 per share over a five year period. Using the Black-Scholes model the Company estimated the fair value of the warrants to be $1,749,845. The Company engaged certain consultants in connection with the offering of the preferred stock. The consultants were compensated with $214,000 in cash and the issuance of warrants to purchase 284,471 shares of the Company's common shares at exercise prices ranging from $3.41 to $5.00 per share for a period of five years. In the event of liquidation, the holders of the preferred shares are entitled in preference over holders of common shares to be paid first out of the assets of the corporation available for distribution to holders of the Company's capital stock of all classes, an amount equal to two (2) times the original purchase price paid for the preferred stock, or $4,702,000. The holders of the preferred stock are also entitled to receive equally, share for share, as and when declared by the Board of Directors of the Company, cumulative dividends at an annual rate of 8% of the original issue price. Such dividends, if declared, are payable annually on each anniversary date of original issuance. Cumulative dividends earned as of December 31, 2003 were $188,080. No dividends can be declared or paid to holders of common shares unless all cumulative dividends are paid to preferred stockholders. After one year from the date of issuance of the preferred stock, the Company may, at its discretion, repurchase all, but not less than all, of the preferred stock issued for a price of $200 per share plus 8% cumulative dividends. F-28 EPIXTAR CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) NOTE 14. COMMON STOCK WARRANTS A summary of warrants issued and outstanding in connection with convertible debentures and equity transactions as discussed above is presented below. Upon exercise, warrants are convertible into an equal number of the Company's common stock. The warrants are exercisable immediately.
Weighted- Average 2003 Exercise Price ---- -------------- Outstanding at beginning of year -- -- Granted 4,713,611 $1.36 Exercised -- -- Forfeited -- -- --------- Outstanding at end of year 4,713,611 1.36 ========= Warrants exercisable at year-end 4,713,611 1.36 =========
The following table summarizes information for warrants outstanding at December 31, 2003:
Warrants Outstanding ---------------------------------------------------- Range of Number Weighted-Average Weighted- Exercise Outstanding Remaining Average Prices at 12/31/03 in months Exercise Price ------------- ------------- ----------------- -------------- .50 4,000,000 29 $ .50 3.41 - 5.00 284,471 55 4.27 5.01 - 6.00 100,000 57 6.00 6.01 - 7.87 329,140 54 8.00
NOTE 15. RELATED PARTY TRANSACTIONS The Company has entered into two agreements with Transvoice Investment, Inc. ("Transvoice"), the managing member of Transvoice Investment LLC, the Company's majority stockholder. The Chairman of the Board of the Company is one of two stockholders of Transvoice. In October 2001, the Company entered into an agreement with Transvoice, whereby Transvoice had provided certain services related to the development of the Company's internet service provider business. Under the terms of the agreement, the Company is to pay Transvoice $150,000 per month plus $1.00 for each customer in excess of 100,000 customers computed monthly, until such time that the Company is no longer generating revenues from its internet service provider business. The Company incurred expenses of $2,637,618, $2,111,438 and $625,000 during 2003, 2002 and 2001, respectively, for services under this agreement. The Company incurred expenses of $450,000 (unaudited) and $790,835 (unaudited) during the three month periods ended March 31, 2004 and 2003. F-29 EPIXTAR CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) NOTE 15. RELATED PARTY TRANSACTIONS (Continued) In April 2003, the Company entered into an agreement with Transvoice, whereby Transvoice provides consulting services related to the development of marketing and telemarketing aspects of the Company. Transvoice is not compensated for its services but is reimbursed for payments made to subcontractors performing services related to the agreement. The Company incurred expenses under this agreement in the amount of $1,050,000 during the year ended December 31, 2003. The Company incurred expenses of $225,000 (unaudited) under this agreement for the three months ended March 31, 2004. NOTE 16. STOCK OPTION PLAN Options granted under the 2001 incentive stock option plan are exercisable at the market price at the date of grant and, subject to termination of employment, expire five years from the date of grant, are not transferable other than on death, and vest in three equal annual installments commencing one year from the date of grant. A summary of the Company's stock option plan is presented below:
Three Months Ended Year Ended December 31, March 31, 2004 ---------------------------------------------------------------- (Unaudited) 2003 2002 2001 Weighted Weighted Weighted Weighted Average Average Average Average Exercise Exercise Exercise Exercise Shares Price Shares Price Shares Price Shares Price ------ ----- ------ ----- ------ ----- ------ ----- Outstanding at the beginning of the period 4,709,667 $3.45 1,030,000 $2.50 1,050,000 $2.50 Granted at fair value 3,895,000 3.88 -- -- Forfeited (182,000) 4.17 20,000 2.50 Exercised (33,333) .42 -- -- --------- --------- -- Outstanding at the end of the period 4,709,667 $3.45 1,030,000 $2.50 ========= ========= Options exercisable at the end of the period 611,328 338,997 ========= ======== Weighted average fair value of options granted $3.01 $2.46
The following table summarizes information for stock options outstanding at December 31, 2003:
Options Outstanding Options Exercisable ----------------------------------------------- ------------------------------ Range of Number Weighted-Average Weighted- Number Weighted- Exercise Outstanding Remaining Average Exercisable Average Prices at 12/31/03 in years Exercise Price at 12/31/03 Exercise Price ------ ----------- -------- -------------- ----------- -------------- 0.00 - 0.42 66,667 2.83 .42 -- 2.50 - 3.50 4,118,000 2.12 3.25 611,328 2.50 4.50 - 5.00 525,000 2.60 4.80 -- --
F-30 EPIXTAR CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) NOTE 17. COMMITMENTS, CONTINGENCIES AND OTHER MATTERS SAVON During 2001, the Company's subsidiary (Savon) and the minority interest owner of Savon were named as defendants in a lawsuit instituted by Savon's wholesale telecommunications carrier. The lawsuit alleged breach of contract as well as other related theories and damages. Subsequent to the initiation of the lawsuit, the plaintiff filed Chapter 11 under the federal bankruptcy code. Savon had filed what it believed to be valid counterclaims, which were stayed when the plaintiff filed Chapter 11. In August 2002, Savon filed Chapter 11 to stay the plaintiff's possible judgment as well as continuing legal fees it was incurring. During 2003, claims subject to the lawsuit were settled as a result of the bankruptcy reorganization, resulting in payment of $65,000 by the Company. STATE PROCEEDINGS AND INQUIRIES As previously discussed, the Company uses telemarketing services to obtain customers. During the normal course of business, the Company has received inquiries or complaints from regulatory agencies. Despite its attempts to minimize complaints, certain states have issued fines or temporary restraining orders. While the ultimate outcome of these matters cannot be ascertained, the Company believes that there will not be a material adverse effect on the Company's financial position, results of operations or cash flows. FEDERAL TRADE COMMISSION During 2003, the Company was the subject of a proceeding by the Federal Trade Commission ("FTC"). The FTC complaint brought in the United States District Court for the Southern District of Florida alleged that the Company was misleading potential customers of their internet service businesses through the use of third party telemarketers. Specifically, the FTC alleged that the Company was signing up customers for free thirty day trial periods without appropriate consent and failing to inform these customers that unless the service is cancelled before the end of the thirty day trial period, the customers would be billed through their local phone companies. As part of the proceeding, the Company was subject to a temporary restraining order, asset freeze, order permitting expedited discovery, order appointing temporary receiver, and order to show cause as part of the proceeding. In November 2003, without any finding of wrongdoing, the Company entered into a preliminary injunction with the FTC. As a result, the Company was allowed to resume its business and the asset freeze was partially lifted. As part of the agreement, the Company was required to establish an escrow account for the payment of future customer refunds and amounts subject to further resolution of the dispute with the FTC into which $1,701,684 of collections were deposited. As of December 31, 2003, the total amount held in escrow was $ 855,502 and the total amount of cash still restricted totaled $416,721. During 2003, $771,182 was returned to the Company and $75,000 was charged to the Company as fees and fines. F-31 EPIXTAR CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) NOTE 17. COMMITMENTS, CONTINGENCIES AND OTHER MATTERS(Continued) LEASES The Company and its subsidiaries lease office space in Miami, Florida under operating leases ending on September 30, 2006. Rent expense related to these leases amounted to $232,850, $218,273 and $61,970 for the years ended December 31, 2003, 2002 and 2001, respectively, and $78,613 (unaudited) for the three months ended March 31, 2004. During 2003, a subsidiary of the Company leased corporate residences and approximately 32,000 square feet of office space in the Philippines under operating leases expiring in years ranging from 2004 to 2013. Rent expense related these rentals amounted to $63,235 for the year ended December 31, 2003 and $48,772 (unaudited) for the three months ended March 31, 2004. Annual rental commitments for the years ending December 31 are as follows: 2004 $434,000 2005 429,000 2006 446,000 2007 464,000 2008 255,000 Thereafter 378,000 ---------- $2,406,000 ========== INVESTOR CLAIM In 2004, the Company received notification from an investor in the preferred stock private placement of a claim to rescind that investment. Upon advice of legal counsel, the Company believes the claim is without basis. The amount of the investment is $150,000. NOTE 18. EARNINGS (LOSS) PER COMMON SHARE The Company has adopted SFAS Statement No. 128, "Earnings per Share". The statement establishes standards for computing and presenting earnings per share (EPS). It requires dual presentation of basic and diluted EPS on the face of the income statement. There is no presentation of diluted loss per share in 2002 as the effects of stock options, warrants and convertible debt amounts were antidilutive. F-32 EPIXTAR CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) NOTE 18. EARNINGS (LOSS) PER COMMON SHARE (Continued) The following table sets for the reconciliation of the numerator and denominator of the basic and diluted EPS computations:
March 31, December 31, 2004 2003 2003 2002 2001 ---- ---- ---- ---- ---- (Unaudited) (Unaudited) (Restated) (Restated) Numerator: Net income (loss) $ (859,554) $1,976,5540 $ 4,378,859 $(11,944,922) $(2,984,598) Preferred stock dividends 47,019 -- (2,072,455) -- -- ---------- ----------- ----------- ------------ ----------- Numerator for basic income (loss) per share - income (loss) available to common stockholders (812,535) (1,976,550) 2,306,404 (11,944,922) (2,984,598) Effect of dilutive securities: Interest on convertible debt -- -- 43,670 -- -- ----------- ------------ ------------ ------------ ----------- Numerator for diluted income (loss) per share - income available to common stockholders after assumed conversions $ 812,535 $ 1,976,550 $ 2,350,074 $(11,944,922) $(2,984,598) =========== ============ ============ ============ =========== Denominator: Denominator for basic income (loss) per share - weighted average shares 10,671,969 10,503,000 10,554,450 10,503,000 7,758,693 Effect ofdilutive securities: Stock options -- -- 2,829,304 -- -- Warrants -- -- 901,983 -- -- Convertible debt -- -- 167,918 -- -- ----------- ------------ ------------ ------------ ----------- Dilutive potential common shares: Denominator for diluted income (loss) per share -- adjusted weighted-average shares and assumed conversion 10,671,939 12,167,359 14,453,655 10,503,000 7,758,693 ========== ========== ========== ========== ========= Basic income (loss) per share $(0.08) $(0.19) $0.22 $(1.13) $(0.39) ==== ==== ==== ===== ==== Diluted income (loss) per share $(0.08) $ 0.16 $0.16 $(1.13) $(0.39) ==== ===== ==== ===== ====
F-33 EPIXTAR CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) NOTE 18. EARNINGS (LOSS) PER COMMON SHARE (Continued) Pro forma information regarding net income and earnings per share is required by SFAS No. 123, "Accounting for Stock-Based Compensation," and has been determined as if the Company had accounted for its stock options under the fair value method of that Statement. The fair value for these options was estimated at the grant date using a Black-Scholes option pricing model with the following weighted average assumptions for 2003, 2002 and 2001, respectively: risk-free interest rates of 3.04%, 4.08% and 3.12%, dividend yields of 0%, 0% and 0%, volatility factors of the expected market price of the Company's common stock of 214%, 209% and 65%; and a weighted average expected life of the options of 5 years. The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options, which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Because the Company's employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options. For purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense over the options' vesting period. No stock-based employee compensation cost is reflected in net income (loss), as all options granted under those plans had an exercise price equal to the market value of the underlying common stock on the date of the grant. The following table illustrates the effect on net income (loss) and income (loss) per share if the Company had applied the fair value recognition provisions of FASB Statement No. 123, Accounting for Stock-Based Compensation, to stock-based employee compensation.
Three Months Ended Years Ended December 31, March 31, 2004 2003 2002 2001 -------------- ---- ---- ---- (Unaudited) (Restated) (Restated) Net income (loss) $(859,554) $ 4,379,160 $(11,944,922) $(2,984,598) Deduct: total stock- based compensation expense determined under fair value based method for all awards, net of related tax effects -- (2,512,383) (894,600) (459,540) --------- ----------- ------------ ---------- Pro forma net income (loss) $(859,554) $ 1,866,322 $(12,839,522) (3,444,138) ========= =========== ============ ========== Loss per share: Basic: As reported $(0.08) $0.22 $(1.13) $(0.39) ====== ===== ====== ====== Pro forma $(0.08) $0.18 $(1.22) $(0.44) ====== ===== ====== ====== Diluted: As reported $(0.08) $0.16 $(1.13) $(0.39) ====== ===== ====== ====== Pro forma $(0.08) $0.13 $(1.22) $(0.44) ====== ===== ====== ======
F-34 EPIXTAR CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) NOTE 19. PHILIPPINE OPERATIONS In the fourth quarter of 2003, the Company began operating for its benefit the activities of a call center located in the Philippines. In accordance with the terms of an Asset Purchase Agreement (the "Agreement") dated March 2, 2004, a subsidiary of the Company, Epixtar Philippines IT-Enabled Services Corporation (EPISC), agreed to acquire certain assets and assume certain liabilities of I-Call Global Services Corporation (I-Call). The Agreement provides for a purchase price of approximately $821,000 payable $55,000 upon execution of the Agreement; $150,000 at closing subject to certain conditions as defined in the Agreement, plus approximately 65,000 shares of the Epixtar Corp. as defined in the Agreement; and a total of $196,000 at various times up to sixty days after closing date. The closing for this acquisition took place in May 2004. The acquisition of I-Call is not considered by the Company to be a significant acquisition. NOTE 20. -BUSINESS SEGMENTS The Company operates primarily in two segments - internet provider services (ISP) and contact center operations. The majority of the Company's revenue is derived from the ISP segment which provides small businesses with internet access and other services. Information concerning the revenues and operating income for the three months ended March 31, 2004 and 2003 (unaudited) and the years ended December 31, 2003, 2002 and 2001, and the identifiable assets for the two segments in which the Company operates are shown in the following tables:
Three Months Ended March 31, Years Ended December 31, 2004 2003 2003 2002 2001 ---- ---- ---- ---- ---- (Unaudited) (Unaudited) (Restated) (Restated) Operating revenues: Internet provider services $4,535,687 $12,313,776 $35,367,050 $ 26,079,789 $ 1,175,890 Contact centers 185,126 -- 682,064 -- -- Other revenues 155,334 52,999 355,689 171,062 13,833 ---------- ------------ ------------ ------------ ----------- $4,876,147 $ 12,366,775 $ 36,404,803 $ 26,250,851 $ 1,189,723 ========== ============ ============ ============ =========== Income (loss) from operations 227,755 2,547,831 5,896,070 (1,863,504) (1,166,947) Contact centers (1,063,433) -- (1,089,312) -- -- Other (23,876) (91,280) (427,591) (10,038,100) (1,632,810) ----------- ------------ ----------- ----------- ---------- (859,554) 2,456,551 4,379,167 (11,901,604) (2,799,757) =========== ============ =========== =========== ========== Income from continuing operations (859,554) 2,456,550 4,379,160 (11,901,604) (3,251,788) Gain (Loss) from discontinued operations -- -- -- (43,318) 267,190 Income taxes -- (480,000) -- -- -- ------------ ------------ ----------- ------------ ----------- Net income (loss) $ (859,554) $ 1,976,550 $ 4,379,160 $(11,944,922) $(2,984,598) ============ ============ =========== ============ ===========
F-35 EPIXTAR CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) NOTE 20. -BUSINESS SEGMENTS (Continued)
Three Months Ended March 31, Years Ended December 31, 2004 2003 2003 2002 2001 ---- ---- ---- ---- ---- (Unaudited) (Unaudited) (Restated) (Restated) Identifiable Assets: Internet provider services 4,998,649 5,051,380 7,288,991 5,045,550 1,043,947 Contact centers 2,695,047 -- 1,973,403 -- -- Corporate 4,056,259 3,749,673 3,720,400 3,537,595 3,394,350 ---------- --------- ---------- --------- --------- Consolidated totals 11,749,555 8,801,053 12,982,794 8,583,145 4,438,297 ========== ========= ========== ========= ========= Capital Expenditures: Internet provider services 741 -- -- 261,643 70,154 Contact centers 888,884 -- 684,873 -- -- Corporate 71,445 77,384 386,238 42,417 32,803 ---------- ----------- ---------- ---------- --------- Total expenditures 961,070 77,384 1,071,111 304,060 102,957 ========== =========== ========== ========== ========= Depreciation and Amortization: Internet provider services 27,933 27,738 111,353 91,778 5,144 Contact centers 35,995 -- 31,097 -- -- Corporate 41,969 8,262 71,849 6,779 1,673 ---------- ----------- ---------- ---------- --------- Total depreciation and amortization 105,898 36,000 214,299 98,557 6,817 ========== =========== ========== ========== ========= Geographic Revenues: United States 4,691,021 12,366,775 35,752,739 26,250,851 1,189,723 Philippines 185,126 -- 1,368,538 -- -- ---------- ----------- ---------- ---------- --------- 4,876,147 12,366,775 37,121,277 26,250,851 1,189,723 ========== =========== ========== ========== ========= Long-Lived Assets: United States 3,980,926 3,767,243 4,345,947 3,767,243 3,561,740 Philippines 1,502,852 -- 278,169 -- --
F-36 EPIXTAR CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) NOTE 21. QUARTERLY INFORMATION (UNAUDITED) The following is a summary of the Company's unaudited quarterly results of operations for the quarter in years ended December 31, 2003 and 2002.
March 31 June 30, September 30, December 31, 2003 2003 2003 2003 ---- ---- ---- ---- Revenues $12,366,775 $9,268,098 $8,557,326 $6,929,078 Income from operations 2,622,443 1,626,647 1,224,217 (877,719) Net income (loss) 1,976,550 1,370,029 1,104,324 (71,743) Net income (loss) per share - basic 0.19 0.13 0.10 (0.01) Net income (loss) per share - diluted 0.16 0.10 0.08 (0.00) Weighted average common stock outstanding - basic 10,503,000 10,507,539 10,524,689 10,554,450 Weighted average common stock outstanding - diluted 12,167,359 13,600,964 14,083,470 14,453,655 March 31 June 30, September 30, December 31, 2002 2002 2002 2002 ---- ---- ---- ---- (Restated) (Restated) (Restated) (Restated) Revenues 1,901,451 2,910,420 7,749,645 13,689,335 Income from operations (1,083,908) (2,255,458) (869,804) (2,355,967) Net income (1,171,874) (2,359,376) (1,017,223) (7,396,449) Net income per share - basic (0.11) (0.23) (0.10) (0.70) Net income per share - diluted (0.11) (0.23) (0.10) (0.70) Weighted average common stock outstanding - basic 10,503,000 10,503,000 10,503,000 10,503,000 Weighted average common stock outstanding - diluted 10,503,000 10,503,000 10,503,000 10,503,000
Quarterly operating results are not necessarily representative of operations for a full year for various reasons. NOTE 22. SUBSEQUENT EVENTS (UNAUDITED) Epixtar Corp. (Epixtar Corp.) has received $7.5 million in new financing through its placement agent, Maxim Group, LLC. Laurus Master Fund, Ltd. ("Laurus Funds") provided $5 million of financing to Epixtar pursuant to a secured convertible term note, of which $1,930,000 is to be held in a restricted cash account under the sole control of Laurus and may be released upon the fulfillment of certain conditions more fully described in the agreements with Laurus. The term note is convertible at a fixed conversion price of $2.96. In connection with the issuance of the convertible term note, Epixtar also issued to Laurus Funds seven year warrants to purchase up to 493,827 shares of Epixtar's common stock at prices ranging from $4.05 to $4.66. F-37 EPIXTAR CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) NOTE 22. SUBSEQUENT EVENTS (UNAUDITED) (Continued) The remaining $2.5 million was raised through the private sale of convertible notes and common stock purchase warrants to accredited investors. Notes in the principal amount of $1,000,000 or "Bridge Notes" are convertible at a price of $2.37 per share and are secured. The holders of the remaining $1.5 million of convertible notes have the right to convert their notes into shares of the Company's common stock at a price of $2.96 per share or receive the repayment of their principal amount, plus interest. In addition, the holders of the notes received five year warrants to purchase an aggregate of 136,073 shares of the Company's common stock at initial exercise prices of between $5.05 and $4.66. The Bridge Notes and related warrants are required to be converted or exercised in certain circumstances. Epixtar also issued placement agent warrants in connection with each of the above transactions. We will thereby issue warrants to purchase an aggregate of 254,316 shares of common stock of which warrants to purchase approximately 67,564 shares will be deferred until the restrictive cash account referred to above is released. The terms of the placement agent warrants are varied ,as a portion of these warrants were issued in connection with each transaction and the price and the number of shares have been determined in connection with each such transaction. The exercise and conversion prices of all the above securities are subject to price and other adjustment. Each of the Notes contain restrictions on certain actions we may take, including restrictions on dividends, stock repurchases, incurring indebtedness, creating security interests in Epixtar's assets and changing of Epixtar's business. All the above described securities are restricted and Epixtar has undertaken to file a registration statement covering the resale of shares of Common Stock issuable upon conversion of these notes and exercise of these warrants. F-38 EPIXTAR CORP. 2,475,376 shares of common stock ---------------- PROSPECTUS ---------------- EPIXTAR CORP. ---------------- [Alternative page for note financing prospectus] PROSPECTUS 3,591,576 Shares of Common Stock EPIXTAR CORP Stockholder of Epixtar Corp. named under the caption "Selling Stockholder" may offer and sell up to 3,491 576 Shares of our common stock. Of the shares offered hereby all but 195 552 shares will be issued in the future pursuant to warrants and convertible notespresently outstanding. We will not receive any of the proceeds from the sale of shares by the selling stockholders. Concurrently with this offering other stockholders are selling 2,475,376 shares subject to outstand notes and warrants .On June 2004, the price of our Common Stock was $ per share. NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE ADEQUACY OR ACCURACY OF THE PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. A-1 Our common stock being offered by this prospectus involves a high degree of risk. You should read the "Risk Factors" section beginning on page 6 before you decide to purchase any common stock. The date of this Prospectus is The information in this prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell securities, and we are not soliciting offers to buy these securities, in any state where the offer or sale is not permitted. [Alternative page for note financing prospectus] THE OFFERING Our Securities Securities Offered by the Selling Stockholders CommonStock 3,591 576(1) Concurrent Offering 2,475 376 Outstanding before the Offering. Common Stock: 11,158,338 and concurrent offering Preferred Stock: 22,010 Outstanding after the Offering Common stock 16,758,465(4) And concurrent offering Preferred Stock - none A-2 (1) All but 195 552 shares of Common Stock are not presently outstanding but issuable upon conversion of preferred stock or conversion of notes and exercise of warrants held by the selling stockholders. The amount also includes 300,000 shares reserved for issuance upon conversion of accrued and interest. Depending upon the time of conversion a portion of these shares may not be issued. (2) The concurrent offering consists of shares of common stock subject to convertible preferred stock,notes and warrants and shares issued in 2003 and 2004. (3) Exclusive of shares subject to convertible securities, options, and warrants including shares offered by the selling stockholders. (3) Assumes conversion of all convertible securities and exercise of all warrants owned by selling stockholders in offering and concurrent offering.. A-3 [Alternative pages for note financing prospectus] SELLING SHAREHOLDERS .. All of the shares of common stock offered for resale by the selling stockholder are shares issuable upon conversion of convertible notes and exercise of warrants issued in connection with our 2004 note placements. Set forth below is a description of the transactions pursuant to which securities were issued to the selling stockholders. We have received $7.5 million in new financing through a placement agent, Maxim Group, LLC. Laurus Master Fund, Ltd. ("Laurus Funds") provided $5 million of financing to us pursuant to a secured convertible term note, of which $1,930,000 is to be held in a restricted cash account under the sole control of Laurus and may be released upon the fulfillment of certain conditions more fully described in the agreements with Laurus. The term note is convertible at a fixed conversion price of $2.96 or a total of 1,689,189 shares. In connection with the issuance of the convertible term note, we also issued to Laurus Funds seven year warrants to purchase up to 493,827 shares of Epixtar's common stock at prices ranging from $4.05 to $4.66. Of these warrants to purchase 197,531 ,are non-exercisable until the cash in the restriction account is released The remaining $2.5 million was raised through the private sale of convertible notes and common stock purchase warrants to accredited investors. Notes in the principal amount of $1,000,000 or "Bridge Notes" are convertible at a price of $2.37 per share of a total of 421,941 shares. In addition, the holders of the bridge notes received five year warrants to purchase an aggregate of 34,722 shares of the Company's common stock at initial exercise prices of between $5.05. After the Bridge notes were issued and prior to the Laurus transaction with Laurus we issued $1,500,000 convertible short term or "Wedge Notes." The wedge notes were to be repaid or converted upon consummation of a subsequent transaction, the Laurus financing. Upon the Laurus financing $925,000 notes were repaid and 195 552 shares were issued upon conversion. In addition, the purchasers of these notes received five year warrants to purchase an aggregate of 102,027 shares of the Company's common stock at initial exercise prices of $4.05. We also issued placement agent warrants in connection with each of the above transactions to purchase an aggregate of 254,318 shares of common stock. Of these warrants to purchase approximately 67,564 shares will be deferred until the restrictive cash account referred to above is released. MAXIM Group LLC was our placement agent, and Sands Bros & Co. Ltd was a selected dealer and received 84,466. The resale of the shares subject to these warrants are offered hereby. The following table contains information concerning the beneficial ownership of our common stock by the selling stockholders. The table assumes all of the shares being offered will be sold and unless otherwise described these shareholders do not own any additional shares of our common stock. Because the selling stockholders may sell all, some or none of the shares that it holds, the actual number of shares that will be sold by the selling stockholders upon or prior to termination of this offering may vary. The selling stockholders may have sold, transferred or otherwise disposed of all or a portion of their shares since the date on which they provided the information regarding their common stock in transactions exempt from the registration requirements of the Securities Act. Unless otherwise indicated all shares are for Bridge and Wedge investors. Additional information concerning the selling stockholders may be set forth from time to time in prospectus supplements to this prospectus. A-4 Identity of Shares Stockholder or Group Offered - -------------------- ------- Laurus Master Fund (1) 2,431,627 Andrew Bello Landing Wholesale Group Defined Benefit Plan 23,643 Bart Halpern, Inc. 26,234 Defined Benefit Pension Plan Bernd Allen 23,643 Charles Haddad 23,643 Dalewood Associates, LP 45,666 David A. Dion 45,666 Donald Asher Family Trust 45,666 Grossman Family Trust 45,666 Jeffrey Grodko 23,643 Judith Barclay 45,666 Richard Kent 66,072 Thaddeus J. Derynda 45,666 A-5 Wayne Saker 23,643 Gerald Shike 3,401 Jack R. Lee Mary K. Lee 20,406 Alfonso D'Amato Defined Benefit Plan 6,802 John Viney 6,802 Lee R. Thiel, Trustee Lee R. Thiel Rev. Trust DTD 9/23/92 3,401 NeilEllman 20,406 Steven E. Erickson TTE, TGI RRE Dean M. Erickson Trust 20,406 Marvin Black 3,401 Jay S. Youngerman, MD 20,406 Lee Pearlmutter Revocable Trust u/a dated 10/9/92 as amended 2/28/96 11,902 Joseph Marotta Nancy Marotta 3,401 Micheal Harley 3,401 Jerold Weinger Lilli Weinger 20,406 Richard Himpele Linda Himpele 3,401 Frederick R. Brown 3,401 A-6 Kenneth Burdick Denise Burdick 3,401 Leo Long 81,622 Alexander Sandler Bella Sandler 3,401 John Dilemme 3,401 David Sparks 6,802 Vincent Longobardi 20,406 Arthur Fixel Deborah Fixel 3,401 Maxim Group, LLC.(2) 169,857 Sands Brothers(2) 84,466 (1) Represents shares issuable upon conversion of the Laurus note and exercise of Laurus warrants, including up to 248,311 shares issuable upon conversion of accrued interest. (2) Included shares subject to placement agent warrants described above. A-7 You should rely only on the information contained in this document. We have not authorized anyone to provide you with information that is different. This document may only be used where it is legal to sell these securities. The information in this document may only be accurate on the date of this document. Until ___________________, 2004, all dealers that effect transactions in these securities, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to the dealers' obligation to deliver a prospectus when acting as underwriters and with respect to their unsold allotments or subscriptions. [Alternative page for note financing prospectus] EPIXTAR CORP. 3,591 576 shares of common stock ---------------- PROSPECTUS ---------------- A-8 PART II -- INFORMATION NOT REQUIRED IN PROSPECTUS Indemnification of Directors and Officers. No statute, charter provisions, by-laws, contract or other arrangements that insures or indemnifies a controlling person, director or officer of the issuer affects his or her liability in that capacity. Other Expenses of Issuance and Distribution. Registration Fees: Transfer Agent Fees: Printing Costs: Legal Fees: Accounting Fees: Sales Commissions/Finders' Fees: Recent Sales of Unregistered Securities. In April, 2003, we issued 130,000 warrants to purchase shares of our common stock to Sands Brothers pursuant to an investment advisory agreement. This issuance was exempt from the registration requirements of the Securities Act pursuant to Section 4(2) thereof. In April 2003, we issued 13,617 shares of common stock to vendors and their designees pursuant to an agreement with them. This issuance was exempt from the registration requirements of the Securities Act pursuant to Section 4(2) thereof. In June 2003, pursuant to private placement, we issued 23,510 shares of our preferred stock and warrants to purchase shares of our common stock. The preferred stock is convertible into 1,175,000 shares of our common stock at a present conversion price presently of $2.00. We also issued a warrant to these investors to purchase our common stock. We also issued warrants to purchase 64,243 of our shares to persons who assisted in the offering. The issuance of these securities was exempt from the registration requirements of the Securities Act pursuant to Section 4(2) thereof In July 2003, we issued 127,117 shares of our common stock to satisfy promissory notes owed to two entities which produced telemarketing services in the past. In an unrelated transaction we issued warrants to purchase shares to an advisor. The shares were issued for investment to entities which had substantial knowledge of our operations. Therefore the issuance of these shares is exempt from the registration requirements of the Securities Act of 1933 pursuant to Section 4(2). II-1 In July 2003, we issued warrants to purchase 27,726 shares to an investment advisor. We believe this issuance was exempt from the registration requirements of the Securities Act pursuant to Section 4(2) thereof. In September 2003, we issued warrants to purchase 100,000 shares of our common stock to an investment advisor. This issuance was exempt from the registration requirements of the Securities Act pursuant to Section 4(2) thereof. In October 2003, we issued 50,000 shares of our common stock in connection with an agreement to retain an investment advisor. In the same month we issued 15,652 shares of common stock in connection with the acquisition of assets Both of these issuances were exempt from the registration requirements of the Securities Act pursuant to Section 4(2) thereof. In December, 2003, we issued $500,00 principal amounts of notes convertible into 125,000 shares of our common in a private placement. In addition, these lenders received warrants to purchase 62,500 shares of our common stock. These issuances were exempt from the registration requirements of the Securities Act pursuant In March 2004, we issued 75,000 shares of our common stock in connection with an agreement to retain an investment advisor. The investor signed an agreement containing an investment representation. The issuance of these shares was exempt from the registration requirements of the Securities Act pursuant to Section 4(2) thereof. In May and April 2004 we consummated three separate convertible note transactions aggregating $7,500,000. One of these notes for $1,500,000 has either been converted or repaid. We also issued warrants to purchase 630,576 shares of our common stock to the note purchasers. The notes presently outstanding are convertible into 2,111,130 shares of common stock and 195,552 shares have been issued upon conversion of one note. We also issued placement warrants to purchase an additional 254,318 shares of common stock. Each investor represented they were an accredited investor and further represented that they would hold any acquired securities for investment. In April 2004 we issued 65,033 shares of our common stock to the seller of assets we acquired in the Philippines. The recipient represented that it would hold those shares for investment. The issuance of these shares was exempt from the registration requirements of the Securities Act pursuant to Section 4(2) thereof. II-2 Exhibits. Unless otherwise indicated filed herewith: Exhibit No. Description of Document - ----------- ----------------------- 2.1 Exchange Agreement for the Purchase of Part of SavOnCalling.com, LLC between Global Asset Holdings, Inc. and Transvoice Investments, Ltd. Dated November 14, 2000. 2.2 Exchange Agreement by and between Transvoice Investments Ltd., Sheldon Goldstein & Global Asset Holdings, Inc. for National Online Services, Inc. Dated March 31, 2001 (3) 3.1(a) Certificate of Incorporation (2) 3.1(b) Amendments to Certificate of Incorporation (2) 3.1(c) Amendment to Certificate of Incorporation (4) 3.1(d) Amendment to Cert. of Incorporation dated June 11, 2003 (5) 3.2 By-laws (1) 4.1 2001 Stock Option Plan (3) 4.2.1 Warrants issued to Brookfield Investments Ltd. (4) 4.3 Securities Purchase Agreement Dated as of June 11, 2003 (5) 4.4 Form of Warrant Issued in connection with June 11, 2003 Private Placement (5) 4.4.1 Form of warrant issued to third parties in June Private Placement (6) 4.5 Registration Rights Agreement with private placement investor (6) dated as of June 11, 2003 (5) 4.6 Warrant issued to Alpine Capital Partners July 2003 (6) I-3 4.6.1 Warrant issued to investment advisor September 2003 (6) 4.7 Note Purchase Agreement dated December 9, 2003 between Epixtar, Subsidiaries and Note Investors (6) 4.8.1 Epixtar Corp. 7% Secured convertible note due December 9, 2004 (6) 4.8.2 Security Agreement between Epixtar Corp. and Subsidiaries and Note Investor (6) 4.8.3 Warrant granted December 9, 2003 issued to Noteholders Investor (6) 4.8.4 Registration Rights Agreement and Note Investor dated December 9, 2003 (6) 4.9.1 Subsription Agreement dated April 22,2004 between the Company and Bridge Investors* 4.9.2 Form of convertible note dated April 22, 2004 4.9.3 Form of Warrant Issued in connection with Bridge Investor financing* 4.10.1 Subsription Agreement dated May, 2004 between the Company and Wedge Investors* 4.10.2 Form of 7% convertible note dated May 7, 2004 Form of Warrant Issued in connection with Wedge Investor financing* 4.11.1 Securities Purchase Agreement dated May 14, 2004 between Epixtar, Subsidiaries and Note Investor 4.11.2 Form of Laurus secured convertible term note 4.11.3 Master Security Agreement between the Company, certain subsidiaries and Laurus Funds 4.11.4 Form of Warrant I Issued in connection with Laurus financing 4.11.4.1 Warrant II 4.11.5 Restrictive Account Agreement 4.11.5.1 Letter relating to Restricted Account Agreement 10.1 Agreement and release by and among Trans Voice Investments, Ltd., Sheldon Goldstein and Global Asset Holdings, Inc. dated November 30, 2001 (3) 10.2 Brookfield Security Agreement dated as of October 31, 2001 (4) 10.2.1 Letter of Brookfield (4) I-4 10.3 Payment agreement entered into as of October 31, 2001 between National Online Services, Inc. and Trans Voice Investments, Inc. (3) 10.3.1 Amendment to restated payment agreement (4) 10.4 Code of ethics. (4) 10.5 Standard Office Building Lease between Epixtar Management Corp. and Biscayne Center LLC. (6) 10.6 Agreement of lease between Megaworld and Epixtar Philippines IT Enabled Services Corp. (6) 10.7 Reimbursement Agreement between Trans Voice L.L.C. and Epixtar Corp. dated as of April 1, 2003 (6) 10.8 Master Service Agreement - Payment one corporation and the Company subsidiary 10.8.1 Amendments to Master Service Agreement 10.9 Service Bureau Agreement between ACI Billing Services and Epixtar Financial Corp. 21 List of Subsidiaries (6) 23.1 Consents of Independent Certified Public Accountants 1- Filed with our Form 8K on November 11,2000 2- Filed with our form 10SB on November 26, 1999 3- Filed with our form SB2 on June 30, 2003 4- Filed with our annual report on Form 10-K SB on April 11, 2003 5- Filed with our form 10SB on November 26, 1999 6- Filed with our form 10KSB on April 14, 2004 * To be filed by amendment Undertakings. The undersigned registrant hereby undertakes: (1) To file, during any period in which offers or sales are being made, a post-effective amendment to this registration statement: I-5 (i) To include any prospectus required by Section 10(a)(3) of the Securities Act of 1933; (ii) To reflect in the prospectus any facts or events arising after the effective date of the registration statement (or the most recent post-effective amendment thereof) which individually or in the aggregate, represent a fundamental change in the information set forth in the registration statement. Notwithstanding the foregoing, any increase or decrease in the volume of securities offered (if the total dollar value of securities offered would not exceed that which was registered) and any deviation from the low or high end of the estimated maximum offering range may be reflected in the form of prospectus filed with the Commission pursuant to Rule 424(b) if, in the aggregate offering price set forth in the "Calculation of Registration Fee" table in the effective registration statement; and (iii) To include any material information with respect to the plan of distribution not previously disclosed in the registration statement or any material change to such information in the registration statement. (2) That, for the purpose of determining any liability under the Securities Act of 1933, each such post-effective amendment shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. (3) To remove from registration by means of a post-effective amendment any of the securities being registered which remain unsold at the termination of the offering. The undersigned registrant hereby undertakes that, for purposes of determining any liability under the Securities Act of 1933, each filing of the registrant's annual report pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (and, where applicable, each filing of an employee benefit plan's annual report pursuant to Section 15(d) of the Securities Exchange Act of 1934) that is incorporated by reference in the registration statement shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to the initial bona fide offering thereof. I-6 Insofar as indemnification for liabilities arising under the Securities Act of 1933, as amended, may be permitted to directors, officers and controlling persons of the registrant pursuant to the provisions referenced in Item 15 of this registration statement or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission this indemnification is against public policy as expressed in the Securities Act of 1933, as amended, and is, therefore, unenforceable. In the event that a claim for indemnification against these liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer, or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by a director, officer, or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question of whether the indemnification by it is against public policy as expressed in the Securities Act of 1933, as amended, and will be governed by the final adjudication of this issue. I-7 SIGNATURES In accordance with the requirements of the Securities Act of 1933, the registrant certifies that it has reasonable grounds to believe that it meets all of the requirements of filing on Form SB-2 and authorized this registration statement to be signed on its behalf by the undersigned, in the City of Miami, State of Florida on June 17, 2004. EPIXTAR CORP. By: /s/ David Srour --------------- David Srour Director, CEO In accordance with the requirements of the Securities Act of 1933, this registration statement was signed by the following persons in the capacities and on the dates stated: /s/ Irving Greenman June 17, 2004 - ------------------- Irving Greenman Director, CFO, Principal Accounting Officer /s/ William D. Rhodes June 17, 2004 - --------------------- William D. Rhodes Director, President /s/ David Srour June 17, 2004 - --------------- David Srour Director June 17, 2004 - --------------- John Cooney Director June 17, 2004 - ---------------- Kenneth Elan Director June 17, 2004 - ---------------- David Berman Director /s/ Martin Miller June 17, 2004 - ---------------- Martin Miller I-8 CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS We hereby consent to the use in the Prospectus constituting part of this Registration Statement on Form S-1 of Epixtar Corp. of our report dated March 17, 2004, which includes an emphasis of a matter paragraph citing reference to Note 3 to the financial statements, relating to the consolidated financial statements of Epixtar Corp. and subsidiaries for the year ended December 31, 2003, appearing in such Prospectus. We also consent to the reference to us under the headings "Experts" in the Prospectus. RACHLIN COHEN & HOLTZ LLP Miami, Florida June 17, 2004 I-9 CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANT We consent to the use in this Registration Statement on Form S-I of our reports dated __________ and March 11, 2003 (except for Note 2, which is dated April 5, 2004), relating to the consolidated financial statements of Epixtar Corp. and Subsidiaries (formerly Global Asset Holdings, Incorporated and Subsidiaries) for the years ended and December 31, 2001 December 31, 2002, and to the reference to our firm under the caption "Experts" in the prospectus. Liebman, Goldberg & Drogin LLP Garden City, NY June 17, 2004 I-10 EX-4.9.2 2 b332632_ex49-2.txt FORM OF CONVERTIBLE NOTE Exhibit 4.9.2 REGISTRATION RIGHTS AGREEMENT This Registration Rights Agreement (this "Agreement") is made and entered into as of May 14, 2004, by and between Epixtar Corp., a Florida corporation (the "Company"), and Laurus Master Fund, Ltd. (the "Purchaser"). This Agreement is made pursuant to the Securities Purchase Agreement, dated as of the date hereof, by and between the Purchaser and the Company (the "Securities Purchase Agreement"), and pursuant to the Note and the Warrants referred to therein. The Company and the Purchaser hereby agree as follows: 1. Definitions. Capitalized terms used and not otherwise defined herein that are defined in the Securities Purchase Agreement shall have the meanings given such terms in the Securities Purchase Agreement. As used in this Agreement, the following terms shall have the following meanings: "Commission" means the Securities and Exchange Commission. "Common Stock" means shares of the Company's common stock, par value $0.01 per share. "Effectiveness Date" means the 120th day following the date hereof. "Effectiveness Period" shall have the meaning set forth in Section 2(a). "Exchange Act" means the Securities Exchange Act of 1934, as amended, and any successor statute. "Filing Date" means, with respect to the Registration Statement required to be filed hereunder, a date no later than June 18, 2004 and with respect to shares of Common Stock issuable to the Holder as a result of adjustments to the Fixed Conversion Price made pursuant to Section 3.4 of the Secured Convertible Term Note or Section 4 of the Warrant or otherwise, thirty (30) days after the occurrence such event or the date of the adjustment of the Fixed Conversion Price. "Holder" or "Holders" means the Purchaser or any of its affiliates or transferees to the extent any of them hold Registrable Securities. "Indemnified Party" shall have the meaning set forth in Section 5(c). "Indemnifying Party" shall have the meaning set forth in Section 5(c). "Note" has the meaning set forth in the Securities Purchase Agreement. "Proceeding" means an arbitration, action, claim, suit, investigation or proceeding (including, without limitation, an investigation or partial proceeding, such as a deposition), whether commenced or threatened. "Prospectus" means the prospectus included in the Registration Statement (including, without limitation, a prospectus that includes any information previously omitted from a prospectus filed as part of an effective registration statement in reliance upon Rule 430A promulgated under the Securities Act), as amended or supplemented by any prospectus supplement, with respect to the terms of the offering of any portion of the Registrable Securities covered by the Registration Statement, and all other amendments and supplements to the Prospectus, including post-effective amendments, and all material incorporated by reference or deemed to be incorporated by reference in such Prospectus. "Registrable Securities" means the shares of Common Stock issued upon the conversion of the Note and issuable upon exercise of the Warrants. "Registration Statement" means each registration statement required to be filed hereunder, including the Prospectus, amendments and supplements to such registration statement or Prospectus, including pre- and post-effective amendments, all exhibits thereto, and all material incorporated by reference or deemed to be incorporated by reference in such registration statement. "Rule 144" means Rule 144 promulgated by the Commission pursuant to the Securities Act, as such Rule may be amended from time to time, or any similar rule or regulation hereafter adopted by the Commission having substantially the same effect as such Rule. "Rule 415" means Rule 415 promulgated by the Commission pursuant to the Securities Act, as such Rule may be amended from time to time, or any similar rule or regulation hereafter adopted by the Commission having substantially the same effect as such Rule. "Rule 424" means Rule 424 promulgated by the Commission pursuant to the Securities Act, as such Rule may be amended from time to time, or any similar rule or regulation hereafter adopted by the Commission having substantially the same effect as such Rule. "Securities Act" means the Securities Act of 1933, as amended, and any successor statute. "Securities Purchase Agreement" means the agreement between the parties hereto calling for the issuance by the Company of $5,000,000 of convertible Note plus Warrants. "Trading Market" means any of the NASD OTCBB, NASDAQ SmallCap Market, the Nasdaq National Market, the American Stock Exchange or the New York Stock Exchange. "Warrants" means the Common Stock purchase warrants issued pursuant to the Securities Purchase Agreement. 2. Registration. (a) On or prior to the Filing Date the Company shall prepare and file with the Commission a Registration Statement covering the Registrable Securities for an offering to be made on a continuous basis pursuant to Rule 415. The Registration Statement shall be on Form S-1 or SB-2 (except if the Company is not then eligible to register for resale the Registrable Securities on Form S-1 or SB-2, in which case such registration shall be on another appropriate form in accordance herewith). The Company shall cause the Registration Statement to become effective and remain effective as provided herein. The Company shall use its reasonable commercial efforts to cause the Registration Statement to be declared effective under the Securities Act as promptly as possible after the filing thereof, but in any event no later than the Effectiveness Date. The Company shall use its reasonable commercial efforts to keep the Registration Statement continuously effective under the Securities Act until the date which is the earlier date of when (i) all Registrable Securities have been sold or (ii) all Registrable Securities may be sold immediately without registration under the Securities Act and without volume restrictions pursuant to Rule 144(k), as determined by the counsel to the Company pursuant to a written opinion letter to such effect, addressed and acceptable to the Company's transfer agent and the affected Holders (the "Effectiveness Period"). (b) If: (i) the Registration Statement is not filed on or prior to the Filing Date; (ii) the Registration Statement is not declared effective by the Commission by the Effectiveness Date; (iii) after the Registration Statement is filed with and declared effective by the Commission, the Registration Statement ceases to be effective (by suspension or otherwise) as to all Registrable Securities to which it is required to relate at any time prior to the expiration of the Effectiveness Period (without being succeeded immediately by an additional registration statement filed and declared effective) for a period of time which shall exceed 30 days in the aggregate per year or more than 20 consecutive calendar days (defined as a period of 365 days commencing on the date the Registration Statement is declared effective); or (iv) the Common Stock is not listed or quoted, or is suspended from trading on any Trading Market for a period of three (3) consecutive Trading Days (provided the Company shall not have been able to cure such trading suspension within 30 days of the notice thereof or list the Common Stock on another Trading Market); (any such failure or breach being referred to as an "Event," and for purposes of clause (i) or (ii) the date on which such Event occurs, or for purposes of clause (iii) the date which such 30 day or 20 consecutive day period (as the case may be) is exceeded, or for purposes of clause (iv) the date on which such three (3) Trading Day period is exceeded, being referred to as "Event Date"), then until the applicable Event is cured, the Company shall pay to each Holder an amount in cash, as liquidated damages and not as a penalty, equal to 2.0% for each thirty (30) day period (prorated for partial periods) on a daily basis of the original principal amount of the Note. While such Event continues, such liquidated damages shall be paid not less often than each thirty (30) days. Any unpaid liquidated damages as of the date when an Event has been cured by the Company shall be paid within three (3) days following the date on which such Event has been cured by the Company. (c) Within three business days of the Effectiveness Date, the Company shall cause its counsel to issue a blanket opinion in the form attached hereto as Exhibit A, to the transfer agent stating that the shares are subject to an effective registration statement and can be reissued free of restrictive legend upon notice of a sale by Laurus and confirmation by Laurus that it has complied with the prospectus delivery requirements, provided that the Company has not advised the transfer agent orally or in writing that the opinion has been withdrawn. Copies of the blanket opinion required by this Section 2(c) shall be delivered to Laurus within the time frame set forth above. 3. Registration Procedures. If and whenever the Company is required by the provisions hereof to effect the registration of any Registrable Securities under the Securities Act, the Company will, as expeditiously as possible: (a) prepare and file with the Commission the Registration Statement with respect to such Registrable Securities, respond as promptly as possible to any comments received from the Commission, and use its best efforts to cause the Registration Statement to become and remain effective for the Effectiveness Period with respect thereto, and promptly provide to the Purchaser copies of all filings and Commission letters of comment relating thereto; (b) prepare and file with the Commission such amendments and supplements to the Registration Statement and the Prospectus used in connection therewith as may be necessary to comply with the provisions of the Securities Act with respect to the disposition of all Registrable Securities covered by the Registration Statement and to keep such Registration Statement effective until the expiration of the Effectiveness Period; (c) furnish to the Purchaser such number of copies of the Registration Statement and the Prospectus included therein (including each preliminary Prospectus) as the Purchaser reasonably may request to facilitate the public sale or disposition of the Registrable Securities covered by the Registration Statement; (d) use its commercially reasonable efforts to register or qualify the Purchaser's Registrable Securities covered by the Registration Statement under the securities or "blue sky" laws of such jurisdictions within the United States as the Purchaser may reasonably request, provided, however, that the Company shall not for any such purpose be required to qualify generally to transact business as a foreign corporation in any jurisdiction where it is not so qualified or to consent to general service of process in any such jurisdiction; (e) list the Registrable Securities covered by the Registration Statement with any securities exchange on which the Common Stock of the Company is then listed; (f) immediately notify the Purchaser at any time when a Prospectus relating thereto is required to be delivered under the Securities Act, of the happening of any event of which the Company has knowledge as a result of which the Prospectus contained in such Registration Statement, as then in effect, includes an untrue statement of a material fact or omits to state a material fact required to be stated therein or necessary to make the statements therein not misleading in light of the circumstances then existing; and (g) make available for inspection by the Purchaser and any attorney, accountant or other agent retained by the Purchaser, all publicly available, non-confidential financial and other records, pertinent corporate documents and properties of the Company, and cause the Company's officers, directors and employees to supply all publicly available, non-confidential information reasonably requested by the attorney, accountant or agent of the Purchaser. 4. Registration Expenses. All expenses relating to the Company's compliance with Sections 2 and 3 hereof, including, without limitation, all registration and filing fees, printing expenses, fees and disbursements of counsel and independent public accountants for the Company, fees and expenses (including reasonable counsel fees) incurred in connection with complying with state securities or "blue sky" laws, fees of the NASD, transfer taxes, fees of transfer agents and registrars, fees of, and disbursements incurred by, one counsel for the Holders (to the extent such counsel is required due to Company's failure to meet any of its obligations hereunder), are called "Registration Expenses". All selling commissions applicable to the sale of Registrable Securities, including any fees and disbursements of any special counsel to the Holders beyond those included in Registration Expenses, are called "Selling Expenses." The Company shall only be responsible for all Registration Expenses. 5. Indemnification. (a) In the event of a registration of any Registrable Securities under the Securities Act pursuant to this Agreement, the Company will indemnify and hold harmless the Purchaser, and its officers, directors and each other person, if any, who controls the Purchaser within the meaning of the Securities Act, against any losses, claims, damages or liabilities, joint or several, to which the Purchaser, or such persons may become subject under the Securities Act or otherwise, insofar as such losses, claims, damages or liabilities (or actions in respect thereof) arise out of or are based upon any untrue statement or alleged untrue statement of any material fact contained in any Registration Statement under which such Registrable Securities were registered under the Securities Act pursuant to this Agreement, any preliminary Prospectus or final Prospectus contained therein, or any amendment or supplement thereof, or arise out of or are based upon the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, and will reimburse the Purchaser, and each such person for any reasonable legal or other expenses incurred by them in connection with investigating or defending any such loss, claim, damage, liability or action; provided, however, that the Company will not be liable in any such case if and to the extent that any such loss, claim, damage or liability arises out of or is based upon an untrue statement or alleged untrue statement or omission or alleged omission so made in conformity with information furnished by or on behalf of the Purchaser or any such person in writing specifically for use in any such document. (b) In the event of a registration of the Registrable Securities under the Securities Act pursuant to this Agreement, the Purchaser will indemnify and hold harmless the Company, and its officers, directors and each other person, if any, who controls the Company within the meaning of the Securities Act, against all losses, claims, damages or liabilities, joint or several, to which the Company or such persons may become subject under the Securities Act or otherwise, insofar as such losses, claims, damages or liabilities (or actions in respect thereof) arise out of or are based upon any untrue statement or alleged untrue statement of any material fact which was furnished in writing by the Purchaser to the Company expressly for use in (and such information is contained in) the Registration Statement under which such Registrable Securities were registered under the Securities Act pursuant to this Agreement, any preliminary Prospectus or final Prospectus contained therein, or any amendment or supplement thereof, or arise out of or are based upon the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, and will reimburse the Company and each such person for any reasonable legal or other expenses incurred by them in connection with investigating or defending any such loss, claim, damage, liability or action, provided, however, that the Purchaser will be liable in any such case if and only to the extent that any such loss, claim, damage or liability arises out of or is based upon an untrue statement or alleged untrue statement or omission or alleged omission so made in conformity with information furnished in writing to the Company by or on behalf of the Purchaser specifically for use in any such document. Notwithstanding the provisions of this paragraph, the Purchaser shall not be required to indemnify any person or entity in excess of the amount of the aggregate net proceeds received by the Purchaser in respect of Registrable Securities in connection with any such registration under the Securities Act. (c) Promptly after receipt by a party entitled to claim indemnification hereunder (an "Indemnified Party") of notice of the commencement of any action, such Indemnified Party shall, if a claim for indemnification in respect thereof is to be made against a party hereto obligated to indemnify such Indemnified Party (an "Indemnifying Party"), notify the Indemnifying Party in writing thereof, but the omission so to notify the Indemnifying Party shall not relieve it from any liability which it may have to such Indemnified Party other than under this Section 5(c) and shall only relieve it from any liability which it may have to such Indemnified Party under this Section 5(c) if and to the extent the Indemnifying Party is prejudiced by such omission. In case any such action shall be brought against any Indemnified Party and it shall notify the Indemnifying Party of the commencement thereof, the Indemnifying Party shall be entitled to participate in and, to the extent it shall wish, to assume and undertake the defense thereof with counsel satisfactory to such Indemnified Party, and, after notice from the Indemnifying Party to such Indemnified Party of its election so to assume and undertake the defense thereof, the Indemnifying Party shall not be liable to such Indemnified Party under this Section 5(c) for any legal expenses subsequently incurred by such Indemnified Party in connection with the defense thereof; if the Indemnified Party retains its own counsel, then the Indemnified Party shall pay all fees, costs and expenses of such counsel, provided, however, that, if the defendants in any such action include both the indemnified party and the Indemnifying Party and the Indemnified Party shall have reasonably concluded that there may be reasonable defenses available to it which are different from or additional to those available to the Indemnifying Party or if the interests of the Indemnified Party reasonably may be deemed to conflict with the interests of the Indemnifying Party, the Indemnified Party shall have the right to select one separate counsel and to assume such legal defenses and otherwise to participate in the defense of such action, with the reasonable expenses and fees of such separate counsel and other expenses related to such participation to be reimbursed by the Indemnifying Party as incurred. (d) In order to provide for just and equitable contribution in the event of joint liability under the Securities Act in any case in which either (i) the Purchaser, or any officer, director or controlling person of the Purchaser, makes a claim for indemnification pursuant to this Section 5 but it is judicially determined (by the entry of a final judgment or decree by a court of competent jurisdiction and the expiration of time to appeal or the denial of the last right of appeal) that such indemnification may not be enforced in such case notwithstanding the fact that this Section 5 provides for indemnification in such case, or (ii) contribution under the Securities Act may be required on the part of the Purchaser or such officer, director or controlling person of the Purchaser in circumstances for which indemnification is provided under this Section 5; then, and in each such case, the Company and the Purchaser will contribute to the aggregate losses, claims, damages or liabilities to which they may be subject (after contribution from others) in such proportion so that the Purchaser is responsible only for the portion represented by the percentage that the public offering price of its securities offered by the Registration Statement bears to the public offering price of all securities offered by such Registration Statement, provided, however, that, in any such case, (A) the Purchaser will not be required to contribute any amount in excess of the public offering price of all such securities offered by it pursuant to such Registration Statement; and (B) no person or entity guilty of fraudulent misrepresentation (within the meaning of Section 10(f) of the Securities Act) will be entitled to contribution from any person or entity who was not guilty of such fraudulent misrepresentation. 6. Representations and Warranties. (a) The Common Stock of the Company is registered pursuant to Section 12(b) or 12(g) of the Exchange Act and, except with respect to certain matters which the Company has disclosed to the Purchaser on Schedule 4.21 to the Securities Purchase Agreement, the Company has timely filed all proxy statements, reports, schedules, forms, statements and other documents required to be filed by it under the Exchange Act. The Company has filed (i) its Annual Report on Form 10-K for its fiscal year ended December 31, 2003 and (ii) its Quarterly Report on Form 10-Q for its fiscal quarter ended September 30, 2003, and (iii) the Form 8-K filings which it has made during the fiscal year 2004 to date (collectively, the "SEC Reports"). Each SEC Report was, at the time of its filing, in substantial compliance with the requirements of its respective form and none of the SEC Reports, nor the financial statements (and the notes thereto) included in the SEC Reports, as of their respective filing dates, contained any untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading. The financial statements of the Company included in the SEC Reports comply as to form in all material respects with applicable accounting requirements and the published rules and regulations of the Commission or other applicable rules and regulations with respect thereto. Such financial statements have been prepared in accordance with generally accepted accounting principles ("GAAP") applied on a consistent basis during the periods involved (except (i) as may be otherwise indicated in such financial statements or the notes thereto or (ii) in the case of unaudited interim statements, to the extent they may not include footnotes or may be condensed) and fairly present in all material respects the financial condition, the results of operations and the cash flows of the Company and its subsidiaries, on a consolidated basis, as of, and for, the periods presented in each such SEC Report. (b) The Common Stock is traded on the NASD OTCBB and satisfies all requirements for the continuation of such trading. The Company has not received any notice that its Common Stock will not be eligible to be traded on the NASD OTCBB (except for prior notices which have been fully remedied) or that the Common Stock does not meet all requirements for the continuation of such trading. (c) Neither the Company, nor any of its affiliates, nor any person acting on its or their behalf, has directly or indirectly made any offers or sales of any security or solicited any offers to buy any security under circumstances that would cause the offering of the Securities pursuant to the Securities Purchase Agreement to be integrated with prior offerings by the Company for purposes of the Securities Act which would prevent the Company from selling the Common Stock pursuant to Rule 506 under the Securities Act, or any applicable exchange-related stockholder approval provisions, nor will the Company or any of its affiliates or subsidiaries take any action or steps that would cause the offering of the Securities to be integrated with other offerings. (d) The Warrants, the Note and the shares of Common Stock which the Purchaser may acquire pursuant to the Warrants and the Note are all restricted securities under the Securities Act as of the date of this Agreement. The Company will not issue any stop transfer order or other order impeding the sale and delivery of any of the Registrable Securities at such time as such Registrable Securities are registered for public sale or an exemption from registration is available, except as required by federal or state securities laws or as otherwise permitted by this Agreement, the Purchase Agreement or any Related Agreement. (e) The Company understands the nature of the Registrable Securities issuable upon the conversion of the Note and the exercise of the Warrant and recognizes that the issuance of such Registrable Securities may have a potential dilutive effect. The Company specifically acknowledges that its obligation to issue the Registrable Securities is binding upon the Company and enforceable regardless of the dilution such issuance may have on the ownership interests of other shareholders of the Company. (f) Except for agreements made in the ordinary course of business, there is no agreement that has not been filed with the Commission as an exhibit to a registration statement or to a form required to be filed by the Company under the Exchange Act, the breach of which could reasonably be expected to have a material and adverse effect on the Company and its subsidiaries, or would prohibit or otherwise interfere with the ability of the Company to enter into and perform any of its obligations under this Agreement in any material respect. (g) The Company will at all times have authorized and reserved a sufficient number of shares of Common Stock for the full conversion of the Note and exercise of the Warrants. 7. Miscellaneous. (a) Remedies. In the event of a breach by the Company or by a Holder, of any of their respective obligations under this Agreement, each Holder or the Company, as the case may be, in addition to being entitled to exercise all rights granted by law and under this Agreement, including recovery of damages, will be entitled to specific performance of its rights under this Agreement. (b) No Piggyback on Registrations. Except as and to the extent specified in Schedule 7(b) hereto, neither the Company nor any of its security holders (other than the Holders in such capacity pursuant hereto) may include securities of the Company in any Registration Statement other than the Registrable Securities, and the Company shall not after the date hereof enter into any agreement providing any such right for inclusion of shares in the Registration Statement to any of its security holders. Except as and to the extent specified in Schedule 7(b) hereto, the Company has not previously entered into any agreement granting any registration rights with respect to any of its securities to any Person that have not been fully satisfied. (c) Compliance. Each Holder covenants and agrees that it will comply with the prospectus delivery requirements of the Securities Act as applicable to it in connection with sales of Registrable Securities pursuant to the Registration Statement. (d) Discontinued Disposition. Each Holder agrees by its acquisition of such Registrable Securities that, upon receipt of a notice from the Company of the occurrence of a Discontinuation Event (as defined below), such Holder will forthwith discontinue disposition of such Registrable Securities under the applicable Registration Statement until such Holder's receipt of the copies of the supplemented Prospectus and/or amended Registration Statement or until it is advised in writing (the "Advice") by the Company that the use of the applicable Prospectus may be resumed, and, in either case, has received copies of any additional or supplemental filings that are incorporated or deemed to be incorporated by reference in such Prospectus or Registration Statement. The Company may provide appropriate stop orders to enforce the provisions of this paragraph. For purposes of this Section 7(d), a "Discontinuation Event" shall mean (i) when the Commission notifies the Company whether there will be a "review" of such Registration Statement and whenever the Commission comments in writing on such Registration Statement (the Company shall provide true and complete copies thereof and all written responses thereto to each of the Holders); (ii) any request by the Commission or any other Federal or state governmental authority for amendments or supplements to such Registration Statement or Prospectus or for additional information; (iii) the issuance by the Commission of any stop order suspending the effectiveness of such Registration Statement covering any or all of the Registrable Securities or the initiation of any Proceedings for that purpose; (iv) the receipt by the Company of any notification with respect to the suspension of the qualification or exemption from qualification of any of the Registrable Securities for sale in any jurisdiction, or the initiation or threatening of any Proceeding for such purpose; and/or (v) the occurrence of any event or passage of time that makes the financial statements included in such Registration Statement ineligible for inclusion therein or any statement made in such Registration Statement or Prospectus or any document incorporated or deemed to be incorporated therein by reference untrue in any material respect or that requires any revisions to such Registration Statement, Prospectus or other documents so that, in the case of such Registration Statement or Prospectus, as the case may be, it will not contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading. (e) Piggy-Back Registrations. If at any time during the Effectiveness Period there is not an effective Registration Statement covering all of the Registrable Securities and the Company shall determine to prepare and file with the Commission a registration statement relating to an offering for its own account or the account of others under the Securities Act of any of its equity securities, other than on Form S-4 or Form S-8 (each as promulgated under the Securities Act) or their then equivalents relating to equity securities to be issued solely in connection with any acquisition of any entity or business or equity securities issuable in connection with stock option or other employee benefit plans, then the Company shall send to each Holder written notice of such determination and, if within fifteen days after receipt of such notice, any such Holder shall so request in writing, the Company shall include in such registration statement all or any part of such Registrable Securities such holder requests to be registered to the extent the Company may do so without violating registration rights of others which exist as of the date of this Agreement, subject to customary underwriter cutbacks applicable to all holders of registration rights and subject to obtaining any required the consent of any selling stockholder(s) to such inclusion under such registration statement. (f) Amendments and Waivers. The provisions of this Agreement, including the provisions of this sentence, may not be amended, modified or supplemented, and waivers or consents to departures from the provisions hereof may not be given, unless the same shall be in writing and signed by the Company and the Holders of the then outstanding Registrable Securities. Notwithstanding the foregoing, a waiver or consent to depart from the provisions hereof with respect to a matter that relates exclusively to the rights of certain Holders and that does not directly or indirectly affect the rights of other Holders may be given by Holders of at least a majority of the Registrable Securities to which such waiver or consent relates; provided, however, that the provisions of this sentence may not be amended, modified, or supplemented except in accordance with the provisions of the immediately preceding sentence. (g) Notices. Any notice or request hereunder may be given to the Company or the Purchaser at the respective addresses set forth below or as may hereafter be specified in a notice designated as a change of address under this Section 7(g). Any notice or request hereunder shall be given by registered or certified mail, return receipt requested, hand delivery, overnight mail, Federal Express or other national overnight next day carrier (collectively, "Courier") or telecopy (confirmed by mail). Notices and requests shall be, in the case of those by hand delivery, deemed to have been given when delivered to any party to whom it is addressed, in the case of those by mail or overnight mail, deemed to have been given three (3) business days after the date when deposited in the mail or with the overnight mail carrier, in the case of a Courier, the next business day following timely delivery of the package with the Courier, and, in the case of a telecopy, when confirmed. The address for such notices and communications shall be as follows: If to the Company: Epixtar Corp. 11900 Biscayne Boulevard, Suite 262 Miami, Florida 33181 Attention: David Srour Facsimile: 305-503-8610 with a copy to: MICHAEL DIGIOVANNA, ESQ. 212 CARNEGIE CENTER SUITE 206 PRINCETON, NEW JERSEY 08540 Facsimile: 609-452-9473 If to a Purchaser: To the address set forth under such Purchaser name on the signature pages hereto. If to any other Person who is then the registered Holder: To the address of such Holder as it appears in the stock transfer books of the Company or such other address as may be designated in writing hereafter in accordance with this Section 7(g) by such Person. (h) Successors and Assigns. This Agreement shall inure to the benefit of and be binding upon the successors and permitted assigns of each of the parties and shall inure to the benefit of each Holder. The Company may not assign its rights or obligations hereunder without the prior written consent of each Holder. Each Holder may assign their respective rights hereunder in the manner and to the Persons as permitted under the Notes and the Security Agreement with the prior written consent of the Company, which consent shall not be unreasonably withheld. (i) Execution and Counterparts. This Agreement may be executed in any number of counterparts, each of which when so executed shall be deemed to be an original and, all of which taken together shall constitute one and the same Agreement. In the event that any signature is delivered by facsimile transmission, such signature shall create a valid binding obligation of the party executing (or on whose behalf such signature is executed) the same with the same force and effect as if such facsimile signature were the original thereof. (j) Governing Law. All questions concerning the construction, validity, enforcement and interpretation of this Agreement shall be governed by and construed and enforced in accordance with the internal laws of the State of New York, without regard to the principles of conflicts of law thereof. Except as set forth below in this Section 7(j), any and all disputes, controversies and claims that the Company or any of its Subsidiaries may assert against the Purchaser arising out of or relating to this Agreement, the Securities Purchase Agreement or any other Related Agreement shall be determined exclusively by arbitration (each such arbitration, an "Arbitration") in New York City before a panel of three neutral arbitrators agreed to by the Purchaser and the Company (collectively, the "Arbitrators") in accordance with and pursuant to the then existing commercial arbitration rules of the American Arbitration Association. The Company (on its behalf and on behalf of its Subsidiaries) hereby irrevocably waives any right to assert such claims in any other forum. The Arbitrators shall have the power in their discretion to award specific performance or injunctive relief (but shall not have the power to render any incidental, special or punitive damages) and reasonable attorneys' fees and expenses to any party in any arbitration. The Arbitrators may not change, modify or alter any express condition, term or provision of this Agreement, the Securities Purchase Agreement or of any other Related Agreement nor shall they have the power to render any award against the Purchaser that would have such effect. Each Arbitration award shall be final and binding upon the parties subject thereto and judgment may be entered thereon in any court of competent jurisdiction. The service of any notice, process, motion or other document in connection with an Arbitration or for the enforcement of any Arbitration award may be made in the same manner as communications may be given under Section 7(g) hereof. Notwithstanding the foregoing, the provisions of this Section 7(j) nor any other provision contained in this Agreement, the Securities Purchase Agreement or in any Related Agreement shall limit in any manner whatsoever the Purchaser's right to commence an action against or in connection with the Company, any of its Subsidiaries or their respective properties in any court of competent jurisdiction or otherwise utilize judicial process in connection with or arising out of the Purchaser's rights and remedies under this Agreement, the Securities Purchase Agreement and/or any Related Agreement or otherwise (any such action, a "Court Action"). Court Actions may be brought by the Purchaser in any state or federal court of competent jurisdiction and the Company (on its behalf and on behalf of its Subsidiaries) irrevocably submits to the jurisdiction of such state and federal courts and irrevocably waives any claim or defense of inconvenient forum or lack of personal jurisdiction in such forum or right of removal or right to jury trial under any applicable law or decision or otherwise. Service of any notice, process, motion or other document in connection with a Court Action may be made in the same manner as communications may be given under Section 7(g). In addition, the Purchaser may serve process in any other manner permitted under applicable law. If either party shall commence a Proceeding to enforce any provisions of this Agreement, the Securities Purchase Agreement or any other Related Agreement, then the prevailing party in such Proceeding shall be reimbursed by the other party for its reasonable attorneys fees and other costs and expenses incurred with the investigation, preparation and prosecution of such Proceeding. (k) Cumulative Remedies. The remedies provided herein are cumulative and not exclusive of any remedies provided by law. (l) Severability. If any term, provision, covenant or restriction of this Agreement is held by a court of competent jurisdiction to be invalid, illegal, void or unenforceable, the remainder of the terms, provisions, covenants and restrictions set forth herein shall remain in full force and effect and shall in no way be affected, impaired or invalidated, and the parties hereto shall use their reasonable efforts to find and employ an alternative means to achieve the same or substantially the same result as that contemplated by such term, provision, covenant or restriction. It is hereby stipulated and declared to be the intention of the parties that they would have executed the remaining terms, provisions, covenants and restrictions without including any of such that may be hereafter declared invalid, illegal, void or unenforceable. (m) Headings. The headings in this Agreement are for convenience of reference only and shall not limit or otherwise affect the meaning hereof. [BALANCE OF PAGE INTENTIONALLY LEFT BLANK; SIGNATURE PAGE FOLLOWS] IN WITNESS WHEREOF, the parties have executed this Registration Rights Agreement as of the date first written above. EPIXTAR CORP. LAURUS MASTER FUND, LTD. By: By: ---------------------------- ----------------------------------- Name: Name: ---------------------------- ----------------------------------- Title: Title: ---------------------------- ----------------------------------- Address for Notices: 825 Third Avenue - 14th Floor New York, NY 10022 Attention: Eugene Grin Facsimile: 212-541-4434 EXHIBIT A [Month __, 2004] [Continental Stock Transfer & Trust Company Two Broadway New York, NY 10004 Attn: William Seegraber] Re: Epixtar Corp. Registration Statement on Form [S-1][SB-2] ---------------------------------------------------------------------- Ladies and Gentlemen: As counsel to Epixtar Corp., a Florida corporation (the "Company"), we have been requested to render our opinion to you in connection with the resale by the individuals or entitles listed on Schedule A attached hereto (the "Selling Stockholders"), of an aggregate of [amount]shares (the "Shares") of the Company's Common Stock. A Registration Statement on Form [S-1][SB-2] under the Securities Act of 1933, as amended (the "Act"), with respect to the resale of the Shares was declared effective by the Securities and Exchange Commission on [date]. Enclosed is the Prospectus dated [date]. We understand that the Shares are to be offered and sold in the manner described in the Prospectus. Based upon the foregoing, upon request by the Selling Stockholders at any time while the registration statement remains effective, it is our opinion that the Shares have been registered for resale under the Act and new certificates evidencing the Shares upon their transfer or re-registration by the Selling Stockholders may be issued without restrictive legend. We will advise you if the registration statement is not available or effective at any point in the future. Very truly yours, [Company counsel] SCHEDULE A Shares Selling Stockholder Being Offered - ------------------- ------------- EX-4.11.1 3 b332632_ex411-1.txt SECURITIES PURCHASE AGREEMENT Exhibit 4.11.1 EPIXTAR CORP. SECURITIES PURCHASE AGREEMENT MAY 14, 2004 TABLE OF CONTENTS
PAGE ---- 1. Agreement to Sell and Purchase...........................................................................1 2. Fees and Warrant.........................................................................................2 3. Closing, Delivery and Payment............................................................................2 3.1 Closing.......................................................................................2 3.2 Delivery......................................................................................2 4. Representations and Warranties of the Company............................................................3 4.1 Organization, Good Standing and Qualification.................................................3 4.2 Subsidiaries..................................................................................4 4.3 Capitalization; Voting Rights.................................................................4 4.4 Authorization; Binding Obligations............................................................5 4.5 Liabilities...................................................................................5 4.6 Agreements; Action............................................................................5 4.7 Obligations to Related Parties................................................................6 4.8 Changes.......................................................................................7 4.9 Title to Properties and Assets; Liens, Etc....................................................8 4.10 Intellectual Property.........................................................................8 4.11 Compliance with Other Instruments.............................................................9 4.12 Litigation....................................................................................9 4.13 Tax Returns and Payments......................................................................9 4.14 Employees....................................................................................10 4.15 Registration Rights and Voting Rights........................................................10 4.16 Compliance with Laws; Permits................................................................11 4.17 Environmental and Safety Laws................................................................11 4.18 Valid Offering...............................................................................11 4.19 Full Disclosure..............................................................................11 4.20 Insurance....................................................................................12 4.21 SEC Reports..................................................................................12 4.22 Listing......................................................................................12 4.23 No Integrated Offering.......................................................................12 4.24 Stop Transfer................................................................................13 4.25 Dilution.....................................................................................13 4.26 Patriot Act..................................................................................13 5. Representations and Warranties of the Purchaser.........................................................13 5.1 No Shorting..................................................................................14 5.2 Requisite Power and Authority................................................................14 5.3 Investment Representations...................................................................14 5.4 Purchaser Bears Economic Risk................................................................14 5.5 Acquisition for Own Account..................................................................14 5.6 Purchaser Can Protect Its Interest...........................................................15 5.7 Accredited Investor..........................................................................15 5.8 Legends......................................................................................15
i 6. Covenants of the Company................................................................................16 6.1 Stop-Orders..................................................................................16 6.2 Listing......................................................................................16 6.3 Market Regulations...........................................................................16 6.4 Reporting Requirements.......................................................................16 6.5 Use of Funds.................................................................................16 6.6 Access to Facilities.........................................................................17 6.7 Taxes........................................................................................17 6.8 Insurance....................................................................................17 6.9 Intellectual Property........................................................................18 6.10 Properties...................................................................................18 6.11 Confidentiality..............................................................................19 6.12 Required Approvals...........................................................................19 6.13 Reissuance of Securities.....................................................................21 6.14 Opinion......................................................................................21 6.15 Margin Stock.................................................................................21 6.16 Restricted Cash Disclosure...................................................................21 6.17 Additional Reserve Accounts..................................................................21 6.18 Foreign Security.............................................................................22 7. Covenants of the Purchaser..............................................................................23 7.1 Confidentiality..............................................................................23 7.2 Non-Public Information.......................................................................23 8. Covenants of the Company and Purchaser Regarding Indemnification........................................23 8.1 Company Indemnification......................................................................23 8.2 Purchaser's Indemnification..................................................................24 9. Conversion of Convertible Note..........................................................................24 9.1 Mechanics of Conversion......................................................................24 10. Registration Rights.....................................................................................25 10.1 Registration Rights Granted..................................................................25 10.2 Offering Restrictions........................................................................25 11. Miscellaneous...........................................................................................26 11.1 Governing Law................................................................................26 11.2 Survival.....................................................................................27 11.3 Successors...................................................................................27 11.4 Entire Agreement.............................................................................27 11.5 Severability.................................................................................27 11.6 Amendment and Waiver.........................................................................27 11.7 Delays or Omissions..........................................................................28 11.8 Notices......................................................................................28 11.9 Attorneys' Fees..............................................................................29 11.10 Titles and Subtitles.........................................................................29 11.11 Facsimile Signatures; Counterparts...........................................................29 11.12 Broker's Fees................................................................................29 11.13 Construction.................................................................................29
ii LIST OF EXHIBITS Form of Convertible Term Note................................................................................... Exhibit A Form of Warrant................................................................................................. Exhibit B Form of Opinion................................................................................................. Exhibit C Form of Escrow Agreement........................................................................................ Exhibit D
iii SECURITIES PURCHASE AGREEMENT THIS SECURITIES PURCHASE AGREEMENT (this "Agreement") is made and entered into as of May 14, 2004 by and between EPIXTAR CORP., a Florida corporation (the "Company"), and Laurus Master Fund, Ltd., a Cayman Islands company (the "Purchaser"). RECITALS WHEREAS, the Company has authorized the sale to the Purchaser of a Convertible Term Note in the aggregate principal amount of Five Million Dollars ($5,000,000) (the "Note"), which Note is convertible into shares of the Company's common stock, $0.001 par value per share (the "Common Stock") at an initial fixed conversion price of $2.96 per share of Common Stock ("Fixed Conversion Price"); WHEREAS, the Company wishes to issue a warrants to the Purchaser to purchase up to 493,827 shares of the Company's Common Stock (subject to adjustment as set forth therein) in connection with Purchaser's purchase of the Note; WHEREAS, Purchaser desires to purchase the Note and the Warrants (as defined in Section 2) on the terms and conditions set forth herein; and WHEREAS, the Company desires to issue and sell the Note and Warrants to Purchaser on the terms and conditions set forth herein. AGREEMENT NOW, THEREFORE, in consideration of the foregoing recitals and the mutual promises, representations, warranties and covenants hereinafter set forth and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows: 1. Agreement to Sell and Purchase. Pursuant to the terms and conditions set forth in this Agreement, on the Closing Date (as defined in Section 3), the Company agrees to sell to the Purchaser, and the Purchaser hereby agrees to purchase from the Company, a Note in the aggregate principal amount of $5,000,000 convertible in accordance with the terms thereof into shares of the Company's Common Stock in accordance with the terms of the Note and this Agreement. The Note purchased on the Closing Date shall be known as the "Offering." A form of the Note is annexed hereto as Exhibit A. The Note will mature on the Maturity Date (as defined in the Note). Collectively, the Note and the Warrants and Common Stock issuable in payment of the Note, upon conversion of the Note and upon exercise of the Warrants are referred to as the "Securities." 1 2. Fees and Warrant. On the Closing Date: (a) The Company will issue and deliver to the Purchaser (x) a Warrant to purchase up to 296,296 shares of Common Stock in connection with the Offering ("Warrant I") and (y) a Warrant to purchase up to 197,531 shares of Common Stock in connection with the Offering ("Warrant II" and, together with Warrant I, the "Warrants" and each, a "Warrant"), in each case, pursuant to Section 1 hereof. Each Warrant must be delivered on the Closing Date. A form of each Warrant is annexed hereto as Exhibit B. All the representations, covenants, warranties, undertakings, and indemnification, and other rights made or granted to or for the benefit of the Purchaser by the Company are hereby also made and granted in respect of the Warrants and shares of the Company's Common Stock issuable upon exercise of the Warrants (the "Warrant Shares"). (b) Subject to the terms of Section 2(d) below, the Company shall pay to Laurus Capital Management, LLC, the manager of the Purchaser, a closing payment in an amount equal to three and one-half percent (3.50%) of the aggregate principal amount of the Note. The foregoing fee is referred to herein as the "Closing Payment." (c) The Company shall reimburse the Purchaser for its reasonable expenses for services rendered to the Purchaser in preparation of this Agreement and the Related Agreements (as hereinafter defined), and expenses incurred in connection with the Purchaser's due diligence review of the Company and all related matters. Amounts required to be paid under this Section 2(c), to the extent not yet paid, shall be paid by the Company on the Closing Date. The total amount to be paid by the Company pursuant to this clause (c) shall be $44,500. (d) The Closing Payment, the expenses referred to in clause (c) of this Section 2 (net of deposits previously paid by the Company) shall be paid at closing out of funds held pursuant to a Funds Escrow Agreement of even date herewith among the Company, Purchaser, and an Escrow Agent (the "Funds Escrow Agreement") and a disbursement letter (the "Disbursement Letter"). 3. Closing, Delivery and Payment; Certain Closing Conditions. 3.1 Closing. Subject to the terms and conditions herein, the closing of the transactions contemplated hereby (the "Closing"), shall take place on the date hereof, at such time or place as the Company and Purchaser may mutually agree (such date is hereinafter referred to as the "Closing Date"). 3.2 Delivery. Pursuant to the Funds Escrow Agreement in the form attached hereto as Exhibit C, at the Closing on the Closing Date, the Company will deliver to the Purchaser, among other things, a Note in the form attached as Exhibit A representing the aggregate principal amount of $5,000,000 and each Warrant in the form attached as Exhibit B in the Purchaser's name representing an aggregate amount of 493,827 Warrant Shares and the Purchaser will deliver to the Company, among other things, the amounts set forth in the Disbursement Letter by certified funds or wire transfer (it being understood that $1,930,000 of the proceeds of the Note will be deposited in the Laurus Restricted Account (as defined in the Laurus Restricted Account Agreement referred to below)). 2 3.3 Bridge Loan Documents and Wedge Documents. The Purchaser shall be satisfied with the terms and conditions of (i) each Bridge Loan Document (as defined in the Intercreditor Agreement (as defined below)) and all agreements related thereto and (ii) each document evidencing indebtedness in an aggregate amount equal to $1,500,000 incurred by the Company (the "Wedge Documents"), in each case, dated as of May 7, 2004 shall be satisfactory in form and substance to the Purchaser (it being understood and agreed that the fixed conversion price applicable to the indebtedness underlying (x) the Bridge Loan Documents shall be no less than $2.88 of the Fixed Conversion Price (as defined in the Note) and (y) the Wedge Documents shall be no less than 80% of the Fixed Conversion Price). 3.4 Redirection Notices. The Company shall have provided to Payment One Corporation ("Payment One"), and PaymentOne shall have acknowledged, a notice redirecting certain holdbacks and reserves to the Reserve Restricted Account (as defined in the Reserve Restricted Account Agreement), which notices shall be in form and substance satisfactory to the Purchaser. Payment One and ILD Telecommunications, Inc, a Delaware corporation ("ILD") are collectively referred to in this Agreement as the "Existing Billing Agencies". 4. Representations and Warranties of the Company. The Company hereby represents and warrants to the Purchaser as follows (which representations and warranties are supplemented by the Company's filings under the Securities Exchange Act of 1934 (collectively, the "Exchange Act Filings"), copies of which have been provided to the Purchaser): 4.1 Organization, Good Standing and Qualification. Each of the Company and each of its Subsidiaries is a corporation, partnership or limited liability company, as the case may be, duly organized, validly existing and in good standing under the laws of its jurisdiction of organization. Each of the Company and each of its Subsidiaries has the corporate power and authority to own and operate its properties and assets, to execute and deliver (i) this Agreement, (ii) the Note and the Warrants to be issued in connection with this Agreement, (iii) the Master Security Agreement dated as of the date hereof between the Company, certain Subsidiaries of the Company and the Purchaser (as amended, modified or supplemented from time to time, the "Master Security Agreement"), (iv) the Registration Rights Agreement relating to the Securities dated as of the date hereof between the Company and the Purchaser, (v) the Subsidiary Guaranty dated as of the date hereof made by certain Subsidiaries of the Company (as amended, modified or supplemented from time to time, the "Subsidiary Guaranty"), (vi) the Stock Pledge Agreement dated as of the date hereof among the Company, certain Subsidiaries of the Company and the Purchaser (as amended, modified or supplemented from time to time, the "Stock Pledge Agreement"), (vii) the Escrow Agreement dated as of the date hereof among the Company, the Purchaser and the escrow agent referred to therein, (viii) the Laurus Restricted Account Agreement dated as of the date hereof among the Company, the Purchaser and North Fork Bank (including the side letter dated as of the date hereof and related thereto, the "Laurus Restricted Account Agreement"), (ix) the Reserve Restricted Account Agreement dated as of the date hereof among the Company, the Purchaser and North Fork Bank (the "Reserve Restricted Account Agreement"), (x) the Intercreditor and Collateral Agency Agreement dated as of the date hereof between the Purchaser and the Bridge Loan Creditors referred to therein, and acknowledged to by the Company, (xi) the Foreign Documentation (as defined below) and (xii) all other agreements related to this Agreement and the Note and referred to herein (the preceding clauses (ii) through (xii), collectively, the "Related Agreements"), to issue and sell the Note and the shares of Common Stock issuable upon conversion of the Note (the "Note Shares"), to issue and sell the Warrants and the Warrant Shares, and to carry out the provisions of this Agreement and the Related Agreements and to carry on its business as presently conducted. Each of the Company and each of its Subsidiaries is duly qualified and is authorized to do business and is in good standing as a foreign corporation, partnership or limited liability company, as the case may be, in all jurisdictions in which the nature of its activities and of its properties (both owned and leased) makes such qualification necessary, except for those jurisdictions in which failure to do so has not, or could not reasonably be expected to have, individually or in the aggregate, a material adverse effect on the business, assets, liabilities, condition (financial or otherwise), properties, operations or prospects of the Company and it Subsidiaries, taken individually and as a whole (a "Material Adverse Effect"). 3 4.2 Subsidiaries. Each direct and indirect Subsidiary of the Company, the direct owner of such Subsidiary and its percentage ownership thereof, is set forth on Schedule 4.2. No Immaterial Subsidiary owns any assets (other than immaterial assets) or has any significant operations. For the purpose of this Agreement, (x) a "Subsidiary" of any person or entity means (i) a corporation or other entity whose shares of stock or other ownership interests having ordinary voting power (other than stock or other ownership interests having such power only by reason of the happening of a contingency) to elect a majority of the directors of such corporation, or other persons or entities performing similar functions for such person or entity, are owned, directly or indirectly, by such person or entity or (ii) a corporation or other entity in which such person or entity owns, directly or indirectly, more than 50% of the equity interests at such time and (y) the "Immaterial Subsidiaries" shall mean, collectively, Epixtar Communications Corp., a Florida corporation, Epixtar Prepaid Communications Corp., a Delaware corporation, One World Public Communications Corp., a Delaware corporation, SavonCalling.com, LLC, a Florida corporation, Epixtar Solutions Corp., a Delaware corporation, Epixtar Account Services Corp., a Delaware corporation, Epixtar Marketing Services Corp, a Delaware corporation and each Subsidiary of the Company that does not own any assets (other than immaterial assets) or have any significant operations. 4.3 Capitalization; Voting Rights. (a) The authorized capital stock of the Company, as of the date hereof consists of 60,000,000 shares, of which 50,000,000 are shares of Common Stock, par value $0.001 per share, 10,962,663 shares of which are issued and outstanding, and 10,000,000 are shares of preferred stock, par value $0.001 per share of which 22,010 shares of preferred stock are issued and outstanding. The authorized capital stock of each Subsidiary of the Company is set forth on Schedule 4.3. (b) Except as disclosed on Schedule 4.3, other than: (i) the shares reserved for issuance under the Company's stock option plans; and (ii) shares which may be granted pursuant to this Agreement and the Related Agreements, there are no outstanding options, warrants, rights (including conversion or preemptive rights and rights of first refusal), proxy or stockholder agreements, or arrangements or agreements of any kind for the purchase or acquisition from the Company of any of its securities. Except as disclosed on Schedule 4.3, neither the offer, issuance or sale of any of the Note or the Warrants, or the issuance of any of the Note Shares or Warrant Shares, nor the consummation of any transaction contemplated hereby will result in a change in the price or number of any securities of the Company outstanding, under anti-dilution or other similar provisions contained in or affecting any such securities. 4 (c) All issued and outstanding shares of the Company's Common Stock: (i) have been duly authorized and validly issued and are fully paid and nonassessable; and (ii) were issued in compliance with all applicable state and federal laws concerning the issuance of securities. (d) The rights, preferences, privileges and restrictions of the shares of the Common Stock are as stated in the Company's Certificate of Incorporation (the "Charter"). The Note Shares and Warrant Shares have been duly and validly reserved for issuance. When issued in compliance with the provisions of this Agreement and the Company's Charter, the Securities will be validly issued, fully paid and nonassessable, and will be free of any liens or encumbrances; provided, however, that the Securities may be subject to restrictions on transfer under state and/or federal securities laws as set forth herein or as otherwise required by such laws at the time a transfer is proposed. 4.4 Authorization; Binding Obligations. All corporate, partnership or limited liability company, as the case may be, action on the part of the Company and each of its Subsidiaries (including the respective officers and directors) necessary for the authorization of this Agreement and the Related Agreements, the performance of all obligations of the Company and its Subsidiaries hereunder and under the other Related Agreements at the Closing and, the authorization, sale, issuance and delivery of the Note and the Warrants has been taken or will be taken prior to the Closing. This Agreement and the Related Agreements, when executed and delivered and to the extent it is a party thereto, will be valid and binding obligations of each of the Company and each of its Subsidiaries, enforceable against each such person in accordance with their terms, except: (a) as limited by applicable bankruptcy, insolvency, reorganization, moratorium or other laws of general application affecting enforcement of creditors' rights; and (b) general principles of equity that restrict the availability of equitable or legal remedies. The sale of the Note and the subsequent conversion of the Note into Note Shares are not and will not be subject to any preemptive rights or rights of first refusal that have not been properly waived or complied with. The issuance of the Warrants and the subsequent exercise of the Warrants for Warrant Shares are not and will not be subject to any preemptive rights or rights of first refusal that have not been properly waived or complied with. 4.5 Liabilities. Neither the Company nor any of its Subsidiaries has any contingent liabilities, except current liabilities incurred in the ordinary course of business and liabilities disclosed in any Exchange Act Filings. 4.6 Agreements; Action. Except as set forth on Schedule 4.6 or as disclosed in any Exchange Act Filings: (a) there are no agreements, understandings, instruments, contracts, proposed transactions, judgments, orders, writs or decrees to which the Company or any of its Subsidiaries is a party or by which it is bound which may involve: (i) obligations (contingent or otherwise) of, or payments to, the Company in excess of $50,000 (other than obligations of, or payments to, the Company arising from agreements entered into in the ordinary course of business); or (ii) the transfer or license of any patent, copyright, trade secret or other proprietary right to or from the Company (other than licenses arising from the purchase of "off the shelf" or other standard products); or (iii) provisions restricting the development, manufacture or distribution of the Company's products or services; or (iv) indemnification by the Company with respect to infringements of proprietary rights. 5 (b) Since December 31, 2003, neither the Company nor any of its Subsidiaries has: (i) declared or paid any dividends, or authorized or made any distribution upon or with respect to any class or series of its capital stock; (ii) incurred any indebtedness for money borrowed or any other liabilities (other than ordinary course obligations) individually in excess of $50,000 or, in the case of indebtedness and/or liabilities individually less than $50,000, in excess of $100,000 in the aggregate; (iii) made any loans or advances to any person not in excess, individually or in the aggregate, of $100,000, other than ordinary course advances for travel expenses; or (iv) sold, exchanged or otherwise disposed of any of its assets or rights, other than the sale of its inventory in the ordinary course of business. (c) For the purposes of subsections (a) and (b) above, all indebtedness, liabilities, agreements, understandings, instruments, contracts and proposed transactions involving the same person or entity (including persons or entities the Company has reason to believe are affiliated therewith) shall be aggregated for the purpose of meeting the individual minimum dollar amounts of such subsections. 4.7 Obligations to Related Parties. Except as set forth on Schedule 4.7, there are no obligations of the Company or any of its Subsidiaries to officers, directors, stockholders or employees of the Company or any of its Subsidiaries other than: (a) for payment of salary for services rendered and for bonus payments; (b) reimbursement for reasonable expenses incurred on behalf of the Company and its Subsidiaries; (c) for other standard employee benefits made generally available to all employees (including stock option agreements outstanding under any stock option plan approved by the Board of Directors of the Company); and (d) obligations listed in the Company's financial statements or disclosed in any of its Exchange Act Filings. Except as described above or set forth on Schedule 4.7, none of the officers, directors or, to the best of the Company's knowledge, key employees or stockholders of the Company or any members of their immediate families, are indebted to the Company, individually or in the aggregate, in excess of $50,000 or have any direct or indirect ownership interest in any firm or corporation with which the Company is affiliated or with which the Company has a business relationship, or any firm or corporation which competes with the Company, other than passive investments in publicly traded companies (representing less than one percent (1%) of such company) which may compete with the Company. Except as described above, no officer, director or stockholder, or any member of their immediate families, is, directly or indirectly, interested in any material contract with the Company and no agreements, understandings or proposed transactions are contemplated between the Company and any such person. Except as set forth on Schedule 4.7, the Company is not a guarantor or indemnitor of any indebtedness of any other person, firm or corporation. 6 4.8 Changes. Since December 31, 2003, except as disclosed in any Exchange Act Filing or in any Schedule to this Agreement (including Schedule 4.8) or to any of the Related Agreements, there has not been: (a) any change in the business, assets, liabilities, condition (financial or otherwise), properties, operations or prospects of the Company or any of its Subsidiaries, which individually or in the aggregate has had, or could reasonably be expected to have, individually or in the aggregate, a Material Adverse Effect; (b) any resignation or termination of any officer, key employee or group of employees of the Company or any of its Subsidiaries; (c) any material change, except in the ordinary course of business, in the contingent obligations of the Company or any of its Subsidiaries by way of guaranty, endorsement, indemnity, warranty or otherwise; (d) any damage, destruction or loss, whether or not covered by insurance, has had, or could reasonably be expected to have, individually or in the aggregate, a Material Adverse Effect; (e) any waiver by the Company or any of its Subsidiaries of a valuable right or of a material debt owed to it; (f) any direct or indirect loans made by the Company or any of its Subsidiaries to any stockholder, employee, officer or director of the Company or any of its Subsidiaries, other than advances made in the ordinary course of business; (g) any material change in any compensation arrangement or agreement with any employee, officer, director or stockholder of the Company or any of its Subsidiaries; (h) any declaration or payment of any dividend or other distribution of the assets of the Company or any of its Subsidiaries; (i) any labor organization activity related to the Company or any of its Subsidiaries; (j) any debt, obligation or liability incurred, assumed or guaranteed by the Company or any of its Subsidiaries, except those for immaterial amounts and for current liabilities incurred in the ordinary course of business; 7 (k) any sale, assignment or transfer of any patents, trademarks, copyrights, trade secrets or other intangible assets owned by the Company or any of its Subsidiaries; (l) any change in any material agreement to which the Company or any of its Subsidiaries is a party or by which either the Company or any of its Subsidiaries is bound which either individually or in the aggregate has had, or could reasonably be expected to have, individually or in the aggregate, a Material Adverse Effect; (m) any other event or condition of any character that, either individually or in the aggregate, has had, or could reasonably be expected to have, individually or in the aggregate, a Material Adverse Effect; or (n) any arrangement or commitment by the Company or any of its Subsidiaries to do any of the acts described in subsection (a) through (m) above. 4.9 Title to Properties and Assets; Liens, Etc. Except as set forth on Schedule 4.9, each of the Company and each of its Subsidiaries has good and marketable title to its properties and assets, and good title to its leasehold estates, in each case subject to no mortgage, pledge, lien, lease, encumbrance or charge, other than: (a) those resulting from taxes which have not yet become delinquent; (b) minor liens and encumbrances which do not materially detract from the value of the property subject thereto or materially impair the operations of the Company or any of its Subsidiaries; and (c) those that have otherwise arisen in the ordinary course of business. All facilities, machinery, equipment, fixtures, vehicles and other properties owned, leased or used by the Company and its Subsidiaries are in good operating condition and repair and are reasonably fit and usable for the purposes for which they are being used. Except as set forth on Schedule 4.9, the Company and its Subsidiaries are in compliance with all material terms of each lease to which it is a party or is otherwise bound. 4.10 Intellectual Property. (a) Each of the Company and each of its Subsidiaries owns or possesses sufficient legal rights to all patents, trademarks, service marks, trade names, copyrights, trade secrets, licenses, information and other proprietary rights and processes necessary for its business as now conducted and to the Company's knowledge, as presently proposed to be conducted (the "Intellectual Property"), without any known infringement of the rights of others. There are no outstanding options, licenses or agreements of any kind relating to the foregoing proprietary rights, nor is the Company or any of its Subsidiaries bound by or a party to any options, licenses or agreements of any kind with respect to the patents, trademarks, service marks, trade names, copyrights, trade secrets, licenses, information and other proprietary rights and processes of any other person or entity other than such licenses or agreements arising from the purchase of "off the shelf" or standard products. 8 (b) Neither the Company nor any of its Subsidiaries has received any communications alleging that the Company or any of its Subsidiaries has violated any of the patents, trademarks, service marks, trade names, copyrights or trade secrets or other proprietary rights of any other person or entity, nor is the Company or any of its Subsidiaries aware of any basis therefor. (c) The Company does not believe it is or will be necessary to utilize any inventions, trade secrets or proprietary information of any of its employees made prior to their employment by the Company or any of its Subsidiaries, except for inventions, trade secrets or proprietary information that have been rightfully assigned to the Company or any of its Subsidiaries. 4.11 Compliance with Other Instruments. Neither the Company nor any of its Subsidiaries is in violation or default of (x) any term of its Certificate of Incorporation or Bylaws, (y) any term of the Bridge Loan Documents or the Wedge Documents or (z) of any provision of any indebtedness, mortgage, indenture, contract, agreement or instrument to which it is party or by which it is bound or of any judgment, decree, order or writ, which violation or default, in the case of this clause (z), has had, or could reasonably be expected to have, either individually or in the aggregate, a Material Adverse Effect. The execution, delivery and performance of and compliance with this Agreement and the Related Agreements to which it is a party, and the issuance and sale of the Note by the Company and the other Securities by the Company each pursuant hereto and thereto, will not, with or without the passage of time or giving of notice, result in any such material violation, or be in conflict with or constitute a default under any such term or provision, or result in the creation of any mortgage, pledge, lien, encumbrance or charge upon any of the properties or assets of the Company or any of its Subsidiaries or the suspension, revocation, impairment, forfeiture or nonrenewal of any permit, license, authorization or approval applicable to the Company, its business or operations or any of its assets or properties. 4.12 Litigation. Except as set forth on Schedule 4.12 hereto, there is no action, suit, proceeding or investigation pending or, to the Company's knowledge, currently threatened against the Company or any of its Subsidiaries that prevents the Company or any of its Subsidiaries from entering into this Agreement or the other Related Agreements, or from consummating the transactions contemplated hereby or thereby, or which has had, or could reasonably be expected to have, either individually or in the aggregate, a Material Adverse Effect or any change in the current equity ownership of the Company or any of its Subsidiaries, nor is the Company aware that there is any basis to assert any of the foregoing. Neither the Company nor any of its Subsidiaries is a party or subject to the provisions of any order, writ, injunction, judgment or decree of any court or government agency or instrumentality. There is no action, suit, proceeding or investigation by the Company or any of its Subsidiaries currently pending or which the Company or any of its Subsidiaries intends to initiate. 4.13 Tax Returns and Payments. Each of the Company and each of its Subsidiaries has timely filed all tax returns (federal, state and local) required to be filed by it. All taxes shown to be due and payable on such returns, any assessments imposed, and all other taxes due and payable by the Company or any of its Subsidiaries on or before the Closing, have been paid or will be paid prior to the time they become delinquent. Except as set forth on Schedule 4.13, neither the Company nor any of its Subsidiaries has been advised: 9 (a) that any of its returns, federal, state or other, have been or are being audited as of the date hereof; or (b) of any deficiency in assessment or proposed judgment to its federal, state or other taxes. The Company has no knowledge of any liability of any tax to be imposed upon its properties or assets as of the date of this Agreement that is not adequately provided for. 4.14 Employees. Except as set forth on Schedule 4.14, neither the Company nor any of its Subsidiaries has any collective bargaining agreements with any of its employees. There is no labor union organizing activity pending or, to the Company's knowledge, threatened with respect to the Company or any of its Subsidiaries. Except as disclosed in the Exchange Act Filings or on Schedule 4.14, neither the Company nor any of its Subsidiaries is a party to or bound by any currently effective employment contract, deferred compensation arrangement, bonus plan, incentive plan, profit sharing plan, retirement agreement or other employee compensation plan or agreement. To the Company's knowledge, no employee of the Company or any of its Subsidiaries, nor any consultant with whom the Company or any of its Subsidiaries has contracted, is in violation of any term of any employment contract, proprietary information agreement or any other agreement relating to the right of any such individual to be employed by, or to contract with, the Company or any of its Subsidiaries because of the nature of the business to be conducted by the Company or any of its Subsidiaries; and to the Company's knowledge the continued employment by the Company or any of its Subsidiaries of its present employees, and the performance of the Company's and its Subsidiaries' contracts with its independent contractors, will not result in any such violation. Neither the Company nor any of its Subsidiaries is aware that any of its employees is obligated under any contract (including licenses, covenants or commitments of any nature) or other agreement, or subject to any judgment, decree or order of any court or administrative agency, that would interfere with their duties to the Company or any of its Subsidiaries. Neither the Company nor any of its Subsidiaries has received any notice alleging that any such violation has occurred. Except for employees who have a current effective employment agreement with the Company or any of its Subsidiaries, no employee of the Company or any of its Subsidiaries has been granted the right to continued employment by the Company or any of its Subsidiaries or to any material compensation following termination of employment with the Company or any of its Subsidiaries. Except as set forth on Schedule 4.14, the Company is not aware that any officer, key employee or group of employees intends to terminate his, her or their employment with the Company or any of its Subsidiaries, nor does the Company or any of its Subsidiaries have a present intention to terminate the employment of any officer, key employee or group of employees. 4.15 Registration Rights and Voting Rights. Except as set forth on Schedule 4.15 and except as disclosed in Exchange Act Filings, neither the Company nor any of its Subsidiaries is presently under any obligation, and neither the Company nor any of its Subsidiaries has granted any rights, to register any of the Company's or its Subsidiaries' presently outstanding securities or any of its securities that may hereafter be issued. Except as set forth on Schedule 4.15 and except as disclosed in Exchange Act Filings, to the Company's knowledge, no stockholder of the Company or any of its Subsidiaries has entered into any agreement with respect to the voting of equity securities of the Company or any of its Subsidiaries. 10 4.16 Compliance with Laws; Permits. Neither the Company nor any of its Subsidiaries is in violation of any applicable statute, rule, regulation, order or restriction of any domestic or foreign government or any instrumentality or agency thereof in respect of the conduct of its business or the ownership of its properties which has had, or could reasonably be expected to have, either individually or in the aggregate, a Material Adverse Effect. No governmental orders, permissions, consents, approvals or authorizations are required to be obtained and no registrations or declarations are required to be filed in connection with the execution and delivery of this Agreement or any other Related Agreement and the issuance of any of the Securities, except such as has been duly and validly obtained or filed, or with respect to any filings that must be made after the Closing, as will be filed in a timely manner. Each of the Company and its Subsidiaries has all material franchises, permits, licenses and any similar authority necessary for the conduct of its business as now being conducted by it, the lack of which could, either individually or in the aggregate, reasonably be expected to have a Material Adverse Effect. 4.17 Environmental and Safety Laws. Neither the Company nor any of its Subsidiaries is in violation of any applicable statute, law or regulation relating to the environment or occupational health and safety, and to its knowledge, no material expenditures are or will be required in order to comply with any such existing statute, law or regulation. Except as set forth on Schedule 4.17, no Hazardous Materials (as defined below) are used or have been used, stored, or disposed of by the Company or any of its Subsidiaries or, to the Company's knowledge, by any other person or entity on any property owned, leased or used by the Company or any of its Subsidiaries. For the purposes of the preceding sentence, "Hazardous Materials" shall mean: (a) materials which are listed or otherwise defined as "hazardous" or "toxic" under any applicable local, state, federal and/or foreign laws and regulations that govern the existence and/or remedy of contamination on property, the protection of the environment from contamination, the control of hazardous wastes, or other activities involving hazardous substances, including building materials; or (b) any petroleum products or nuclear materials. 4.18 Valid Offering. Assuming the accuracy of the representations and warranties of the Purchaser contained in this Agreement, the offer, sale and issuance of the Securities will be exempt from the registration requirements of the Securities Act of 1933, as amended (the "Securities Act"), and will have been registered or qualified (or are exempt from registration and qualification) under the registration, permit or qualification requirements of all applicable state securities laws. 4.19 Full Disclosure. Each of the Company and each of its Subsidiaries has provided the Purchaser with all information requested by the Purchaser in connection with its decision to purchase the Note and the Warrants, including all information the Company and its Subsidiaries believe is reasonably necessary to make such investment decision. Neither this Agreement, the Related Agreements, the exhibits and schedules hereto and thereto nor any other document delivered by the Company or any of its Subsidiaries to Purchaser or its attorneys or agents in connection herewith or therewith or with the transactions contemplated hereby or thereby, contain any untrue statement of a material fact nor omit to state a material fact necessary in order to make the statements contained herein or therein, in light of the circumstances in which they are made, not misleading. Any financial projections and other estimates provided to the Purchaser by the Company or any of its Subsidiaries were based on the Company's and its Subsidiaries' experience in the industry and on assumptions of fact and opinion as to future events which the Company or any of its Subsidiaries, at the date of the issuance of such projections or estimates, believed to be reasonable. 11 4.20 Insurance. Each of the Company and each of its Subsidiaries has general commercial, product liability, fire and casualty insurance policies with coverages which the Company believes are customary for companies similarly situated to the Company and its Subsidiaries in the same or similar business. 4.21 SEC Reports. Except as set forth on Schedule 4.21, the Company has filed all proxy statements, reports and other documents required to be filed by it under the Securities Exchange Act 1934, as amended (the "Exchange Act"). The Company has furnished the Purchaser with copies of: (i) its Annual Reports on Form 10-KSB for its fiscal year ended December 31, 2003, (ii) its Quarterly Report on Form 10-QSB for its fiscal quarter ended September 30, 2003 and (iii) the Form 8-K filings which it has made during the fiscal year 2004 to date (collectively, the "SEC Reports"). Except as set forth on Schedule 4.21, each SEC Report was, at the time of its filing, in substantial compliance with the requirements of its respective form and none of the SEC Reports, nor the financial statements (and the notes thereto) included in the SEC Reports, as of their respective filing dates, contained any untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading. 4.22 Listing. The Company's Common Stock is listed for trading on the National Association of Securities Dealers Over the Counter Bulletin Board ("NASD OTCBB") and satisfies all requirements for the continuation of such trading. The Company has not received any notice that its Common Stock will not be eligible to be traded on the NASD OTCBB or that its Common Stock does not meet all requirements for such trading. 4.23 No Integrated Offering. Neither the Company, nor any of its Subsidiaries or affiliates, nor any person acting on its or their behalf, has directly or indirectly made any offers or sales of any security or solicited any offers to buy any security under circumstances that would cause the offering of the Securities pursuant to this Agreement or any of the Related Agreements to be integrated with prior offerings by the Company for purposes of the Securities Act which would prevent the Company from selling the Securities pursuant to Rule 506 under the Securities Act, or any applicable exchange-related stockholder approval provisions, nor will the Company or any of its affiliates or Subsidiaries take any action or steps that would cause the offering of the Securities to be integrated with other offerings. 12 4.24 Stop Transfer. The Securities are restricted securities as of the date of this Agreement. Neither the Company nor any of its Subsidiaries will issue any stop transfer order or other order impeding the sale and delivery of any of the Securities at such time as the Securities are registered for public sale or an exemption from registration is available, except as required by state and federal securities laws. 4.25 Dilution. The Company specifically acknowledges that its obligation to issue the shares of Common Stock upon conversion of the Note and exercise of the Warrants is binding upon the Company and enforceable regardless of the dilution such issuance may have on the ownership interests of other shareholders of the Company. 4.26 Patriot Act. The Company certifies that, to the best of Company's knowledge, neither the Company nor any of its Subsidiaries has been designated, and is not owned or controlled, by a "suspected terrorist" as defined in Executive Order 13224. The Company hereby acknowledges that the Purchaser seeks to comply with all applicable laws concerning money laundering and related activities. In furtherance of those efforts, the Company hereby represents, warrants and agrees that: (i) none of the cash or property that the Company or any of its Subsidiaries will pay or will contribute to the Purchaser has been or shall be derived from, or related to, any activity that is deemed criminal under United States law; and (ii) no contribution or payment by the Company or any of its Subsidiaries to the Purchaser, to the extent that they are within the Company's and/or its Subsidiaries' control shall cause the Purchaser to be in violation of the United States Bank Secrecy Act, the United States International Money Laundering Control Act of 1986 or the United States International Money Laundering Abatement and Anti-Terrorist Financing Act of 2001. The Company shall promptly notify the Purchaser if any of these representations ceases to be true and accurate regarding the Company or any of its Subsidiaries. The Company agrees to provide the Purchaser any additional information regarding the Company or any of its Subsidiaries that the Purchaser deems necessary or convenient to ensure compliance with all applicable laws concerning money laundering and similar activities. The Company understands and agrees that if at any time it is discovered that any of the foregoing representations are incorrect, or if otherwise required by applicable law or regulation related to money laundering similar activities, the Purchaser may undertake appropriate actions to ensure compliance with applicable law or regulation, including but not limited to segregation and/or redemption of the Purchaser's investment in the Company. The Company further understands that the Purchaser may release confidential information about the Company and its Subsidiaries and, if applicable, any underlying beneficial owners, to proper authorities if the Purchaser, in its sole discretion, determines that it is in the best interests of the Purchaser in light of relevant rules and regulations under the laws set forth in subsection (ii) above. 4.27 Billing Agencies. On the date hereof, neither the Company, nor any of its Subsidiaries, maintains any holdbacks or reserves of the type set forth in the redirection notice referred to in Section 3.4 with any person or entity other than Payment One, Hold Billing Services Company, a Texas corporation ("HBS"). and ILD. 5. Representations and Warranties of the Purchaser. The Purchaser hereby represents and warrants to the Company as follows (such representations and warranties do not lessen or obviate the representations and warranties of the Company set forth in this Agreement): 13 5.1 No Shorting. The Purchaser or any of its affiliates and investment partners has not, will not and will not cause any person or entity, directly or indirectly, to engage in "short sales" of the Company's Common Stock as long as the Note shall be outstanding. 5.2 Requisite Power and Authority. The Purchaser has all necessary power and authority under all applicable provisions of law to execute and deliver this Agreement and the Related Agreements and to carry out their provisions. All corporate action on Purchaser's part required for the lawful execution and delivery of this Agreement and the Related Agreements have been or will be effectively taken prior to the Closing. Upon their execution and delivery, this Agreement and the Related Agreements will be valid and binding obligations of Purchaser, enforceable in accordance with their terms, except: (a) as limited by applicable bankruptcy, insolvency, reorganization, moratorium or other laws of general application affecting enforcement of creditors' rights; and (b) as limited by general principles of equity that restrict the availability of equitable and legal remedies. 5.3 Investment Representations. Purchaser understands that the Securities are being offered and sold pursuant to an exemption from registration contained in the Securities Act based in part upon Purchaser's representations contained in the Agreement, including, without limitation, that the Purchaser is an "accredited investor" within the meaning of Regulation D under the Securities Act of 1933, as amended (the "Securities Act"). The Purchaser confirms that it has received or has had full access to all the information it considers necessary or appropriate to make an informed investment decision with respect to the Note and the Warrants to be purchased by it under this Agreement and the Note Shares and the Warrant Shares acquired by it upon the conversion of the Note and the exercise of the Warrants, respectively. The Purchaser further confirms that it has had an opportunity to ask questions and receive answers from the Company regarding the Company's and its Subsidiaries' business, management and financial affairs and the terms and conditions of the Offering, the Note, the Warrants and the Securities and to obtain additional information (to the extent the Company possessed such information or could acquire it without unreasonable effort or expense) necessary to verify any information furnished to the Purchaser or to which the Purchaser had access. 5.4 Purchaser Bears Economic Risk. The Purchaser has substantial experience in evaluating and investing in private placement transactions of securities in companies similar to the Company so that it is capable of evaluating the merits and risks of its investment in the Company and has the capacity to protect its own interests. The Purchaser must bear the economic risk of this investment until the Securities are sold pursuant to: (i) an effective registration statement under the Securities Act; or (ii) an exemption from registration is available with respect to such sale. 5.5 Acquisition for Own Account. The Purchaser is acquiring the Note and the Warrants and the Note Shares and the Warrant Shares for the Purchaser's own account for investment only, and not as a nominee or agent and not with a view towards or for resale in connection with their distribution. 14 5.6 Purchaser Can Protect Its Interest. The Purchaser represents that by reason of its, or of its management's, business and financial experience, the Purchaser has the capacity to evaluate the merits and risks of its investment in the Note, the Warrants and the Securities and to protect its own interests in connection with the transactions contemplated in this Agreement and the Related Agreements. Further, Purchaser is aware of no publication of any advertisement in connection with the transactions contemplated in the Agreement or the Related Agreements. 5.7 Accredited Investor. Purchaser represents that it is an accredited investor within the meaning of Section 501(a)(3) of Regulation D under the Securities Act. 5.8 Legends. (a) The Note shall bear substantially the following legend: "THIS NOTE AND THE COMMON STOCK ISSUABLE UPON CONVERSION OF THIS NOTE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR ANY APPLICABLE, STATE SECURITIES LAWS. THIS NOTE AND THE COMMON STOCK ISSUABLE UPON CONVERSION OF THIS NOTE MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED OR HYPOTHECATED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT AS TO THIS NOTE OR SUCH SHARES UNDER SAID ACT AND APPLICABLE STATE SECURITIES LAWS OR AN OPINION OF COUNSEL REASONABLY SATISFACTORY TO EPIXTAR CORP. THAT SUCH REGISTRATION IS NOT REQUIRED." (b) The Note Shares and the Warrant Shares, if not issued by DWAC system (as hereinafter defined), shall bear a legend which shall be in substantially the following form until such shares are covered by an effective registration statement filed with the SEC: "THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR ANY APPLICABLE STATE SECURITIES LAWS. THESE SHARES MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED OR HYPOTHECATED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT UNDER SUCH SECURITIES ACT AND APPLICABLE STATE LAWS OR AN OPINION OF COUNSEL REASONABLY SATISFACTORY TO EPIXTAR CORP. THAT SUCH REGISTRATION IS NOT REQUIRED." 15 (c) Each Warrant shall bear substantially the following legend: "THIS WARRANT AND THE COMMON SHARES ISSUABLE UPON EXERCISE OF THIS WARRANT HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR ANY APPLICABLE STATE SECURITIES LAWS. THIS WARRANT AND THE COMMON SHARES ISSUABLE UPON EXERCISE OF THIS WARRANT MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED OR HYPOTHECATED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT AS TO THIS WARRANT OR THE UNDERLYING SHARES OF COMMON STOCK UNDER SAID ACT AND APPLICABLE STATE SECURITIES LAWS OR AN OPINION OF COUNSEL REASONABLY SATISFACTORY TO EPIXTAR CORP. THAT SUCH REGISTRATION IS NOT REQUIRED." 6. Covenants of the Company. The Company covenants and agrees with the Purchaser as follows: 6.1 Stop-Orders. The Company will advise the Purchaser, promptly after it receives notice of issuance by the Securities and Exchange Commission (the "SEC"), any state securities commission or any other regulatory authority of any stop order or of any order preventing or suspending any offering of any securities of the Company, or of the suspension of the qualification of the Common Stock of the Company for offering or sale in any jurisdiction, or the initiation of any proceeding for any such purpose. 6.2 Listing. The Company shall promptly secure the listing of the shares of Common Stock issuable upon conversion of the Note and upon the exercise of the Warrants on the NASD OTCBB (the "Principal Market") upon which shares of Common Stock are listed (subject to official notice of issuance) and shall maintain such listing so long as any other shares of Common Stock shall be so listed. The Company will maintain the listing of its Common Stock on the Principal Market, and will comply in all material respects with the Company's reporting, filing and other obligations under the bylaws or rules of the National Association of Securities Dealers ("NASD") and such exchanges, as applicable. 6.3 Market Regulations. The Company shall notify the SEC, NASD and applicable state authorities, in accordance with their requirements, of the transactions contemplated by this Agreement, and shall take all other necessary action and proceedings as may be required and permitted by applicable law, rule and regulation, for the legal and valid issuance of the Securities to the Purchaser and promptly provide copies thereof to the Purchaser. 6.4 Reporting Requirements. The Company will timely file with the SEC all reports required to be filed pursuant to the Exchange Act and refrain from terminating its status as an issuer required by the Exchange Act to file reports thereunder even if the Exchange Act or the rules or regulations thereunder would permit such termination. 6.5 Use of Funds. The Company agrees that it will use the proceeds of the sale of the Note and the Warrants (x) to refinance the any outstanding indebtedness under the Wedge Documents, (y) for general working capital purposes and (z) for the development and acquisition of certain contact centers (it being understood that $1,930,000 of the proceeds of the Note will be deposited in the Laurus Restricted Account on the Closing Date and shall be subject to the terms and conditions of the Laurus Restricted Account Agreement). 16 6.6 Access to Facilities. Each of the Company and each of its Subsidiaries will permit any representatives designated by the Purchaser (or any successor of the Purchaser), upon reasonable notice and during normal business hours, at such person's expense and accompanied by a representative of the Company, to: (a) visit and inspect any of the properties of the Company or any of its Subsidiaries; (b) examine the corporate and financial records of the Company or any of its Subsidiaries (unless such examination is not permitted by federal, state or local law or by contract) and make copies thereof or extracts therefrom; and (c) discuss the affairs, finances and accounts of the Company or any of its Subsidiaries with the directors, officers and independent accountants of the Company or any of its Subsidiaries. Notwithstanding the foregoing, neither the Company nor any of its Subsidiaries will provide any material, non-public information to the Purchaser unless the Purchaser signs a confidentiality agreement and otherwise complies with Regulation FD, under the federal securities laws. 6.7 Taxes. Each of the Company and each of its Subsidiaries will promptly pay and discharge, or cause to be paid and discharged, when due and payable, all lawful taxes, assessments and governmental charges or levies imposed upon the income, profits, property or business of the Company and its Subsidiaries; provided, however, that any such tax, assessment, charge or levy need not be paid if the validity thereof shall currently be contested in good faith by appropriate proceedings and if the Company and/or such Subsidiary shall have set aside on its books adequate reserves with respect thereto, and provided, further, that the Company and its Subsidiaries will pay all such taxes, assessments, charges or levies forthwith upon the commencement of proceedings to foreclose any lien which may have attached as security therefor. 6.8 Insurance. Each of the Company and its Subsidiaries will keep its assets which are of an insurable character insured by financially sound and reputable insurers against loss or damage by fire, explosion and other risks customarily insured against by companies in similar business similarly situated as the Company and its Subsidiaries; and the Company and its Subsidiaries will maintain, with financially sound and reputable insurers, insurance against other hazards and risks and liability to persons and property to the extent and in the manner which the Company reasonably believes is customary for companies in similar business similarly situated as the Company and its Subsidiaries and to the extent available on commercially reasonable terms. The Company, and each of its Subsidiaries will jointly and severally bear the full risk of loss from any loss of any nature whatsoever with respect to the assets pledged to the Purchaser as security for its obligations hereunder and under the Related Agreements. At the Company's and each of its Subsidiaries' joint and several cost and expense in amounts and with carriers reasonably acceptable to Purchaser, the Company and each of its Subsidiaries shall (i) keep all its insurable properties and properties in which it has an interest insured against the hazards of fire, flood, sprinkler leakage, those hazards covered by extended coverage insurance and such other hazards, and for such amounts, as is customary in the case of companies engaged in businesses similar to the Company's or the 17 respective Subsidiary's including business interruption insurance; (ii) maintain a bond in such amounts as is customary in the case of companies engaged in businesses similar to the Company's or the respective Subsidiary's insuring against larceny, embezzlement or other criminal misappropriation of insured's officers and employees who may either singly or jointly with others at any time have access to the assets or funds of the Company or any of its Subsidiaries either directly or through governmental authority to draw upon such funds or to direct generally the disposition of such assets; (iii) maintain public and product liability insurance against claims for personal injury, death or property damage suffered by others; (iv) maintain all such worker's compensation or similar insurance as may be required under the laws of any state or jurisdiction in which the Company or the respective Subsidiary is engaged in business; and (v) furnish Purchaser with (x) copies of all policies and evidence of the maintenance of such policies at least thirty (30) days before any expiration date, (y) excepting the Company's workers' compensation policy, endorsements to such policies naming Purchaser as "co-insured" or "additional insured" and appropriate loss payable endorsements in form and substance satisfactory to Purchaser, naming Purchaser as loss payee, and (z) evidence that as to Purchaser the insurance coverage shall not be impaired or invalidated by any act or neglect of the Company or any Subsidiary and the insurer will provide Purchaser with at least thirty (30) days notice prior to cancellation. The Company and each Subsidiary shall instruct the insurance carriers that in the event of any loss thereunder, the carriers shall make payment for such loss to the Company and/or the Subsidiary and Purchaser jointly. In the event that as of the date of receipt of each loss recovery upon any such insurance, the Purchaser has not declared an event of default with respect to this Agreement or any of the Related Agreements, then the Company and/or such Subsidiary shall be permitted to direct the application of such loss recovery proceeds toward investment in property, plant and equipment that would comprise "Collateral" secured by Purchaser's security interest pursuant to its security agreement, with any surplus funds to be applied toward payment of the obligations of the Company to Purchaser. In the event that Purchaser has properly declared an event of default with respect to this Agreement or any of the Related Agreements, then all loss recoveries received by Purchaser upon any such insurance thereafter may be applied to the obligations of the Company hereunder and under the Related Agreements, in such order as the Purchaser may determine. Any surplus (following satisfaction of all Company obligations to Purchaser) shall be paid by Purchaser to the Company or applied as may be otherwise required by law. Any deficiency thereon shall be paid by the Company or the Subsidiary, as applicable, to Purchaser, on demand. 6.9 Intellectual Property. Each of the Company and each of its Subsidiaries shall maintain in full force and effect its existence, rights and franchises and all licenses and other rights to use Intellectual Property owned or possessed by it and reasonably deemed to be necessary to the conduct of its business. 6.10 Properties. Each of the Company and each of its Subsidiaries will keep its properties in good repair, working order and condition, reasonable wear and tear excepted, and from time to time make all needful and proper repairs, renewals, replacements, additions and improvements thereto; and each of the Company and each of its Subsidiaries will at all times comply with each provision of all leases to which it is a party or under which it occupies property if the breach of such provision could, either individually or in the aggregate, reasonably be expected tohave a Material Adverse Effect. 18 6.11 Confidentiality. The Company agrees that it will not disclose, and will not include in any public announcement, the name of the Purchaser, unless expressly agreed to by the Purchaser or unless and until such disclosure is required by law or applicable regulation, and then only to the extent of such requirement. Notwithstanding the foregoing, the Company may disclose Purchaser's identity and the terms of this Agreement to its current and prospective debt and equity financing sources. 6.12 Required Approvals. For so long as twenty-five percent (25%) of the principal amount of the Note is outstanding, the Company, without the prior written consent of the Purchaser, shall not, and shall not permit any of its Subsidiaries to: (a) (i) directly or indirectly declare or pay any dividends, other than (w) dividends paid to the Company or to any Credit Party (as defined below), (x) dividends paid by the Company in an aggregate amount not to exceed $200,000 in any fiscal year of the Company, (y) dividends paid to holders of Common Stock solely to the extent that such dividends are paid in Common Stock and (z) distribution of shares of a Subsidiary of the Company to the extent that substantially all of the assets of such Subsidiary consist of solely of the equity interests of one or more Foreign Subsidiaries (as defined below) of the Company which are subject to Foreign Documentation (as defined below), (ii) issue any preferred stock that is manditorily redeemable prior to the six month anniversary of the Maturity Date (as defined in the Note) or (iii) redeem any of its preferred stock or other equity interests; (b) liquidate, dissolve or effect a material reorganization, other than (i) the liquidation or dissolution of Immaterial Subsidiaries and (ii) the spin-off of certain Foreign Subsidiaries of the Company solely to the extent that no violation of Section 6.18 has occurred and is continuing and the security interests granted to Laurus as contemplated by this Agreement and the Related Agreements has not been adversely affected in any respect (it being understood that in no event shall the Company dissolve, liquidate or merge with any other person or entity (unless the Company is the surviving entity)); (c) become subject to (including, without limitation, by way of amendment to or modification of) any agreement or instrument which by its terms would (under any circumstances) restrict the Company's or any of its Subsidiaries' right to perform the provisions of this Agreement, any Related Agreement or any of the agreements contemplated hereby or thereby; 19 (d) materially alter or change the scope of the business of the Company and its Subsidiaries taken as a whole; (e) (i) create, incur, assume or suffer to exist any indebtedness (exclusive of trade debt and debt incurred to finance the purchase of equipment (not in excess of five percent (5%) per annum of the fair market value of the Company's assets) whether secured or unsecured other than (w) lease obligations (capitalized or otherwise) incurred by the Company or any of its Subsidiaries in the ordinary course of business, (x) the Company's indebtedness to Laurus, (y) indebtedness set forth on Schedule 6.12(e) attached hereto and made a part hereof and any refinancings or replacements thereof on terms no less favorable to the Purchaser than the indebtedness being refinanced or replaced (provided that the indebtedness incurred under the Bridge Loan Documents and the Wedge Documents shall not be permitted to be refinanced or replaced), and (z) any debt incurred in connection with the purchase of assets in the ordinary course of business, or any refinancings or replacements thereof on terms no less favorable to the Purchaser than the indebtedness being refinanced or replaced; (ii) cancel any debt owing to it in excess of $50,000 in the aggregate during any 12 month period; (iii) assume, guarantee, endorse or otherwise become directly or contingently liable in connection with any obligations of any other Person, except the endorsement of negotiable instruments by the Company for deposit or collection or similar transactions in the ordinary course of business or guarantees of indebtedness otherwise permitted to be outstanding pursuant to this clause (e); (f) create or acquire any Subsidiary after the date hereof unless (i) such Subsidiary is a wholly-owned Subsidiary of the Company and (ii) such Subsidiary becomes party to the Master Security Agreement, the Stock Pledge Agreement, the Subsidiary Guaranty (in each case, either by executing a counterpart thereof or an assumption or joinder agreement in respect thereof) and/or, if requested by the Purchaser with respect to entities located outside of the United States, the foreign equivalent of any such agreement or guaranty (it being understood that the terms and conditions of any such foreign equivalent shall be satisfactory to the Purchaser), and, to the extent required by the Purchaser, satisfies each condition of this Agreement and the Related Agreements as if such Subsidiary were a Subsidiary of the Company on the Closing Date; and (g) (i) make, or permit any of its Subsidiaries which are Credit Parties to make, any investments in, or any loans or advances to, any Subsidiary of the Company which is not a Credit Party, other than, so long as no Event of Default (as defined in the Note) has occurred and is continuing, immaterial investments, loans and/or advances made in the ordinary course of business or (ii) transfer, or permit any Subsidiary of the Company which is a Credit Party to transfer, assets to any Subsidiary of the Company which is not a Credit Party, other than, so long as no Event of Default has occurred and is continuing, immaterial asset transfers made in the ordinary course of business. For the purposes of this Agreement, "Credit Party" shall mean (x) the Company and each Subsidiary of the Company organized in the United States of America that is party to the Master Security Agreement, the Stock Pledge Agreement and the Subsidiary Guaranty and (y) Epixtar Phillippines IT-Enabled Services Corporation, a corporation organized under the laws of the Phillippines ("Epixtar Phillippines"), Epixtar International Contact Center Group, Ltd., a corporation organized under the laws of Bermuda ("Epixtar Bermuda"), and each other wholly-owned Subsidiary of the Company that is organized outside of the United States of America that has executed the Foreign Documentation referred to in Section 6.18 (it being understood and agreed that an Immaterial Subsidiary shall be deemed a Credit Party for purposes of this definition following the execution by such Immaterial Subsidiary of an assumption or joinder agreement with respect to the Master Security Agreement, the Subsidiary Guaranty and the Stock Pledge Agreement). 20 6.13 Reissuance of Securities. The Company agrees to reissue certificates representing the Securities without the legends set forth in Section 5.7 above at such time as: (a) the holder thereof is permitted to dispose of such Securities pursuant to Rule 144(k) under the Securities Act; or (b) upon resale subject to an effective registration statement after such Securities are registered under the Securities Act. The Company agrees to cooperate with the Purchaser in connection with all resales pursuant to Rule 144(d) and Rule 144(k) and provide legal opinions necessary to allow such resales provided the Company and its counsel receive reasonably requested representations from the selling Purchaser and broker, if any. 6.14 Opinion. On the Closing Date, the Company will deliver to the Purchaser an opinion acceptable to the Purchaser from the Company's external legal counsel. The Company will provide, at the Company's expense, such other legal opinions in the future as are deemed reasonably necessary by the Purchaser (and acceptable to the Purchaser) in connection with the conversion of the Note and exercise of the Warrants. 6.15 Margin Stock. The Company will not permit any of the proceeds of the Note or the Warrants to be used directly or indirectly to "purchase" or "carry" "margin stock" or to repay indebtedness incurred to "purchase" or "carry" "margin stock" within the respective meanings of each of the quoted terms under Regulation U of the Board of Governors of the Federal Reserve System as now and from time to time hereafter in effect. 6.16 Restricted Cash Disclosure. The Company agrees that, in connection with its filing of its 8-K Report with the SEC concerning the transactions contemplated by this Agreement and the Related Agreements (such report, the "Laurus Transaction 8-K") in a timely manner after the date hereof, it will disclose in such Laurus Transaction 8-K that $1,930,000 of the proceeds of the Note issued by the Company to the Purchaser has been placed in a restricted cash account under the sole dominion and control of the Purchaser, and the release of the proceeds set forth in such restricted cash account is subject to the approval of the Purchaser. Furthermore, the Company agrees to disclose in all public filings required by the Commission (where appropriate) following the filing of the Laurus Transaction 8-K, the existence of the restricted cash referred to in the immediately preceding sentence, together with the amount thereof. 6.17 Existing and Additional Reserve Accounts. The Company shall not, and shall not permit any of its Subsidiaries to, without the consent of the Purchaser, agree with any Existing Billing Agency or HBS or, following the establishment thereof, any Additional Billing Agency (as defined below), to modify the calculation with respect to the amount of reserves, holdbacks or similar amounts required to be returned to the Company or such Subsidiary, as the case may be, and placed in the Reserve Restricted Account (or, in each case, the procedure therefore). The Company shall not, nor will it permit any of its Subsidiaries to, direct any Billing Agency (as defined below) to forward any reserve, holdback or similar amount maintained by any Billing Agency to any account other than the Reserve Restricted Account. The Company agrees to notify, and cause its Subsidiaries to notify, the Purchaser in the event that any billing agency other than the Existing Billing Agencies (such billing agency, an "Additional Billing Agency" and, together with the Existing Billing Agencies, the "Billing Agencies") maintains reserve accounts similar to those maintained by the Existing Billing Agencies on the date hereof. In the event an Additional Billing Agency exists and at such time the sum of (A) the amount of reserves and 21 holdbacks held by any Existing Billing Agency which is subject to a redirection notice of the type referred to in Section 3.4 (a "Redirection Notice") and (B) the amount of cash contained in the Reserve Restricted Account, is less than the outstanding principal amount of the Note (plus any accrued and unpaid interest and fees related thereto), the Company hereby agrees to, or cause its relevant Subsidiary to, as promptly as practicable but in no event later than 30 days following establishment of a relationship with such Additional Billing Agency, execute a Redirection Notice, redirecting any distribution of reserve amounts maintained by an Additional Billing Agency to the Reserve Restricted Account and, in connection therewith, have such redirection notice executed by the respective Additional Billing Agency. Notwithstanding the foregoing, (x) each of HBS and ILD, shall not be deemed Billing Agencies for purposes of this Agreement; provided that, in the event that the Company or any Subsidiary thereof, on the one hand, and HBS or ILD, on the other hand, modifies any of their agreements in effect on the date hereof, or enters into any new agreements, in either case to provide billing services for the Company or a Subsidiary thereof not previously serviced by the respective entity, and (I) the effect of such modification or new agreement is to increase the amount of reserves or holdbacks held by either of HBS or ILD, respectively, of the type referred to in the redirection notice delivered pursuant to Section 3.4 and (II) and at such time the sum of (A) the amount of reserves and holdbacks held by any Existing Billing Agency which is subject to a redirection notice of the type referred to in Section 3.4 (a "Redirection Notice") and (B) the amount of cash contained in the Reserve Restricted Account, is less than the outstanding principal amount of the Note (plus any accrued and unpaid interest and fees related thereto), the Company shall cause HBS to provide a Redirection Notice in form and substance satisfactory to the Purchaser to the Purchaser as promptly as practicable but in no event later than 30 days following the effectiveness of such modification or new agreement, as the case may be, and, following such modification, HBS shall be considered a Billing Agency for all purposes of this Agreement and (y) the Company shall, or cause the relevant Subsidiary to, to the extent the Company or such Subsidiary receives from ILD after the date hereof any reserves and holdbacks held by them and of the type referred to in the redirection notice delivered pursuant to Section 3.4, deposit in the Reserve Restricted Account all such reserves and holdbacks no later than 3 business days following the receipt thereof. Upon the request of the Purchaser, the Company shall provide the Purchaser with accounting summaries of the holdbacks and reserves referred to in this Section 6.17, which accounting summaries have been prepared by the Billing Agencies and/or the related local exchange carriers in the ordinary course of business. Notwithstanding anything to the contrary contained in this Section 6.17 or elsewhere in this Agreement, the obligations of the Company and its Subsidiaries with respect to reserves and holdbacks shall only apply to reserves and holdbacks required to be maintained by persons or entities (including, without limitation, by local exchange carriers) in connection with the Company or such Subsidiaries' internet service provider business conducted in the United States of America. 6.18 Foreign Security.No later than 45 days following the Closing Date, the Company shall (x) either (I) cause each of Epixtar Philippines and Epixtar Bermuda to grant in favor of the Purchaser a security interest in all of such Subsidiary's assets or (II) cause all of the equity interests of Epixtar Philippines and Epixtar Bermuda to be pledged to the Purchaser and (y) cause Epixtar Philippines and Epixtar Bermuda to guaranty the obligations of the Company set forth in this Agreement and the Related Agreements, in each case pursuant to documentation governed by the jurisdiction of organization of such Subsidiary (the preceding clauses (x) and (y), collectively, the "Foreign Documentation"). Additionally, no later than 60 days following a request by the Purchaser, the Company shall cause each other Subsidiary organized in a jurisdiction outside of the United States (together with Epixtar Philippines and Epixtar Bermuda, collectively, the "Foreign Subsidiaries"), other than an Immaterial Subsidiary, to execute such Foreign Documentation as the Purchaser deems necessary or desirable. All such Foreign Documentation shall be in form and substance satisfactory to the Purchaser, and the Company agrees to cause the respective Foreign Subsidiary to deliver all such other documentation as is requested by the Purchaser in connection with the execution and delivery of such Foreign Documentation (including, without limitation, an opinion of counsel satisfactory to the Purchaser). Furthermore, it is hereby agreed that (x) at such time as Foreign Documentation (together with all such other documentation requested by the Purchaser) with respect to a particular Foreign Subsidiary is delivered to the Purchaser, the Purchaser shall release the pledge of the equity interests of such Foreign Subsidiary granted to it pursuant to the Stock Pledge Agreement and (y) the Company shall not permit any equity interests of any Foreign Subsidiary (or any parent thereof) to be transferred to any person or other entity that is not a Credit Party until such time as the Foreign Subsidiaries have become party to the Foreign Documentation required to be entered into pursuant to this Section 6.18. The Company shall reimburse the Purchaser for any and all legal fees and other expenses incurred by the Purchaser in connection with the preparation, execution, negotiation and delivery of the Foreign Documentation. 22 7. Covenants of the Purchaser. The Purchaser covenants and agrees with the Company as follows: 7.1 Confidentiality. The Purchaser agrees that it will not disclose, and will not include in any public announcement, the name of the Company, unless expressly agreed to by the Company or unless and until such disclosure is required by law or applicable regulation, and then only to the extent of such requirement. 7.2 Non-Public Information. The Purchaser agrees not to effect any sales in the shares of the Company's Common Stock while in possession of material, non-public information regarding the Company if such sales would violate applicable securities law. 8. Covenants of the Company and Purchaser Regarding Indemnification. 8.1 Company Indemnification. The Company agrees to indemnify, hold harmless, reimburse and defend the Purchaser, each of the Purchaser's officers, directors, agents, affiliates, control persons, and principal shareholders, against any claim, cost, expense, liability, obligation, loss or damage (including reasonable legal fees) of any nature, incurred by or imposed upon the Purchaser which results, arises out of or is based upon: (i) any misrepresentation by the Company or any of its Subsidiaries or breach of any warranty by the Company or any of its Subsidiaries in this Agreement, any Related Agreement or in any exhibits or schedules attached hereto or thereto; or (ii) any breach or default in performance by Company or any of its Subsidiaries of any covenant or undertaking to be performed by Company or any of its Subsidiaries hereunder, under any other Related Agreement or any other agreement entered into by the Company and/or any of its Subsidiaries and Purchaser relating hereto or thereto. 23 8.2 Purchaser's Indemnification. Purchaser agrees to indemnify, hold harmless, reimburse and defend the Company and each of the Company's officers, directors, agents, affiliates, control persons and principal shareholders, at all times against any claim, cost, expense, liability, obligation, loss or damage (including reasonable legal fees) of any nature, incurred by or imposed upon the Company which results, arises out of or is based upon: (i) any misrepresentation by Purchaser or breach of any warranty by Purchaser in this Agreement or in any exhibits or schedules attached hereto or any Related Agreement; or (ii) any breach or default in performance by Purchaser of any covenant or undertaking to be performed by Purchaser hereunder, or any other agreement entered into by the Company and Purchaser relating hereto. 9. Conversion of Convertible Note. 9.1 Mechanics of Conversion. (a) Provided the Purchaser has notified the Company of the Purchaser's intention to sell the Note Shares and the Note Shares are included in an effective registration statement or are otherwise exempt from registration when sold: (i) upon the conversion of the Note or part thereof, the Company shall, at its own cost and expense, take all necessary action (including the issuance of an opinion of counsel reasonably acceptable to the Purchaser following a request by the Purchaser) to assure that the Company's transfer agent shall issue shares of the Company's Common Stock in the name of the Purchaser (or its nominee) or such other persons as designated by the Purchaser in accordance with Section 9.1(b) hereof and in such denominations to be specified representing the number of Note Shares issuable upon such conversion; and (ii) the Company warrants that no instructions other than these instructions have been or will be given to the transfer agent of the Company's Common Stock and that after the Effectiveness Date (as defined in the Registration Rights Agreement) the Note Shares issued will be freely transferable subject to the prospectus delivery requirements of the Securities Act and the provisions of this Agreement, and will not contain a legend restricting the resale or transferability of the Note Shares. (b) Purchaser will give notice of its decision to exercise its right to convert the Note or part thereof by telecopying or otherwise delivering an executed and completed notice of the number of shares to be converted to the Company (the "Notice of Conversion"). The Purchaser will not be required to surrender the Note until the Purchaser receives a credit to the account of the Purchaser's prime broker through the DWAC system (as defined below), representing the Note Shares or until the Note has been fully satisfied. Each date on which a Notice of Conversion is telecopied or delivered to the Company in accordance with the provisions hereof shall be deemed a "Conversion Date." Pursuant to the terms of the Notice of Conversion, the Borrower will issue instructions to the transfer agent accompanied by an opinion of counsel within one (1) business day of the date of the delivery to Borrower of the Notice of Conversion and shall cause the transfer agent to transmit the certificates representing the Conversion Shares to the Holder by crediting the account of the Purchaser's prime broker with the Depository Trust Company ("DTC") through its Deposit Withdrawal Agent Commission ("DWAC") system within three (3) business days after receipt by the Company of the Notice of Conversion (the "Delivery Date"). 24 (c) The Company understands that a delay in the delivery of the Note Shares in the form required pursuant to Section 9 hereof beyond the Delivery Date could result in economic loss to the Purchaser. In the event that the Company fails to direct its transfer agent to deliver the Note Shares to the Purchaser via the DWAC system within the time frame set forth in Section 9.1(b) above and the Note Shares are not delivered to the Purchaser by the Delivery Date, as compensation to the Purchaser for such loss, the Company agrees to pay late payments to the Purchaser for late issuance of the Note Shares in the form required pursuant to Section 9 hereof upon conversion of the Note in the amount equal to the greater of: (i) $500 per business day after the Delivery Date; or (ii) the Purchaser's actual damages from such delayed delivery. Notwithstanding the foregoing, the Company will not owe the Purchaser any late payments if the delay in the delivery of the Note Shares beyond the Delivery Date is solely out of the control of the Company and the Company is actively trying to cure the cause of the delay. The Company shall pay any payments incurred under this Section in immediately available funds upon demand and, in the case of actual damages, accompanied by reasonable documentation of the amount of such damages. Such documentation shall show the number of shares of Common Stock the Purchaser is forced to purchase (in an open market transaction) which the Purchaser anticipated receiving upon such conversion, and shall be calculated as the amount by which (A) the Purchaser's total purchase price (including customary brokerage commissions, if any) for the shares of Common Stock so purchased exceeds (B) the aggregate principal and/or interest amount of the Note, for which such Conversion Notice was not timely honored. Nothing contained herein or in any document referred to herein or delivered in connection herewith shall be deemed to establish or require the payment of a rate of interest or other charges in excess of the maximum permitted by applicable law. In the event that the rate of interest or dividends required to be paid or other charges hereunder exceed the maximum amount permitted by such law, any payments in excess of such maximum shall be credited against amounts owed by the Company to a Purchaser and thus refunded to the Company. 10. Registration Rights. 10.1 Registration Rights Granted. The Company hereby grants registration rights to the Purchaser pursuant to a Registration Rights Agreement dated as of even date herewith between the Company and the Purchaser. 10.2 Offering Restrictions. Except as previously disclosed in the SEC Reports or in the Exchange Act Filings, or stock or stock options granted to employees or directors of the Company (these exceptions hereinafter referred to as the "Excepted Issuances"), neither the Company nor any of its Subsidiaries will issue any securities with a continuously variable/floating conversion feature which are or could be (by conversion or registration) free-trading securities (i.e. common stock subject to a registration statement) prior to the full repayment or conversion of the Note (together with all accrued and unpaid interest and fees related thereto) (the "Exclusion Period"), provided that a securities with a variable/floating rate conversion feature that is not less than the Fixed Conversion Price (as defined in the Note) shall be permitted. 25 11. Miscellaneous. 11.1 Governing Law. THIS AGREEMENT AND EACH RELATED AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK, WITHOUT REGARD TO PRINCIPLES OF CONFLICTS OF LAWS. Except as set forth below in this Section 11.1, any and all disputes, controversies and claims that the Company or any of its Subsidiaries may assert against the Purchaser arising out of or relating to this Agreement or any Related Agreement shall be determined exclusively by arbitration (each such arbitration, an "Arbitration") in New York City before a panel of three neutral arbitrators agreed to by the Purchaser and the Company (collectively, the "Arbitrators") in accordance with and pursuant to the then existing commercial arbitration rules of the American Arbitration Association. The Company (on its behalf and on behalf of its subsidiaries) hereby irrevocably waives any right to assert such claims in any other forum. The Arbitrators shall have the power in their discretion to award specific performance or injunctive relief (but shall not have the power to render any incidental, special or punitive damages) and reasonable attorneys' fees and expenses to any party in any arbitration. The Arbitrators may not change, modify or alter any express condition, term or provision of this Agreement or of any Related Agreement nor shall they have the power to render any award against the Purchaser that would have such effect. Each Arbitration award shall be final and binding upon the parties subject thereto and judgment may be entered thereon in any court of competent jurisdiction. The service of any notice, process, motion or other document in connection with an Arbitration or for the enforcement of any Arbitration award may be made in the same manner as communications may be given under Section 11.8 hereof. Notwithstanding the foregoing, the provisions of this Section 11.1 nor any other provision contained in this Agreement or in any Related Agreement shall limit in any manner whatsoever the Purchaser's right to commence an action against or in connection with the Company, any of ITS Subsidiaries or their respective properties in any court of competent jurisdiction or otherwise utilize judicial process in connection with or arising out of the Purchaser's rights and remedies under this Agreement and/or any Related Agreement or otherwise (any such action, a "Court Action"). Court Actions may be brought by the Purchaser in any state or federal court of competent jurisdiction and the Company (on its behalf and on behalf of its subsidiaries) irrevocably submits to the jurisdiction of such state and federal courts and irrevocably waives any claim or defense of inconvenient forum or lack of personal jurisdiction in such forum or right of removal or right to jury trial under any applicable law or decision or otherwise. Service of any notice, process, motion or other document in connection with a Court Action may be made in the same manner as communications may be given under Section 11.8. In addition, the Purchaser may serve process in any other manner permitted under applicable law. IN THE EVENT THAT ANY PROVISION OF THIS AGREEMENT OR ANY RELATED AGREEMENT DELIVERED IN CONNECTION HEREWITH IS INVALID OR UNENFORCEABLE UNDER ANY APPLICABLE STATUTE OR RULE OF LAW, THEN SUCH PROVISION SHALL BE DEEMED INOPERATIVE TO THE EXTENT THAT IT MAY CONFLICT THEREWITH AND SHALL BE DEEMED MODIFIED TO CONFORM WITH SUCH STATUTE OR RULE OF LAW. ANY SUCH PROVISION WHICH MAY PROVE INVALID OR UNENFORCEABLE UNDER ANY LAW SHALL NOT AFFECT THE VALIDITY OR ENFORCEABILITY OF ANY OTHER PROVISION OF THIS AGREEMENT OR ANY RELATED AGREEMENT. 26 11.2 Survival. The representations, warranties, covenants and agreements made herein shall survive any investigation made by the Purchaser and the closing of the transactions contemplated hereby to the extent provided therein. All statements as to factual matters contained in any certificate or other instrument delivered by or on behalf of the Company pursuant hereto in connection with the transactions contemplated hereby shall be deemed to be representations and warranties by the Company hereunder solely as of the date of such certificate or instrument. 11.3 Successors. Except as otherwise expressly provided herein, the provisions hereof shall inure to the benefit of, and be binding upon, the successors, heirs, executors and administrators of the parties hereto and shall inure to the benefit of and be enforceable by each person who shall be a holder of the Securities from time to time, other than the holders of Common Stock which has been sold by the Purchaser pursuant to Rule 144 or an effective registration statement. Purchaser may not assign its rights hereunder to a competitor of the Company. 11.4 Entire Agreement. This Agreement, the Related Agreements, the exhibits and schedules hereto and thereto and the other documents delivered pursuant hereto constitute the full and entire understanding and agreement between the parties with regard to the subjects hereof and no party shall be liable or bound to any other in any manner by any representations, warranties, covenants and agreements except as specifically set forth herein and therein. 11.5 Severability. In case any provision of the Agreement shall be invalid, illegal or unenforceable, the validity, legality and enforceability of the remaining provisions shall not in any way be affected or impaired thereby. 11.6 Amendment and Waiver. (a) This Agreement may be amended or modified only upon the written consent of the Company and the Purchaser. 27 (b) The obligations of the Company and the rights of the Purchaser under this Agreement may be waived only with the written consent of the Purchaser. (c) The obligations of the Purchaser and the rights of the Company under this Agreement may be waived only with the written consent of the Company. 11.7 Delays or Omissions. It is agreed that no delay or omission to exercise any right, power or remedy accruing to any party, upon any breach, default or noncompliance by another party under this Agreement or the Related Agreements, shall impair any such right, power or remedy, nor shall it be construed to be a waiver of any such breach, default or noncompliance, or any acquiescence therein, or of or in any similar breach, default or noncompliance thereafter occurring. All remedies, either under this Agreement or the Related Agreements, by law or otherwise afforded to any party, shall be cumulative and not alternative. 11.8 Notices. All notices required or permitted hereunder shall be in writing and shall be deemed effectively given: (a) upon personal delivery to the party to be notified; (b) when sent by confirmed facsimile if sent during normal business hours of the recipient, if not, then on the next business day; (c) three (3) business days after having been sent by registered or certified mail, return receipt requested, postage prepaid; or (d) one (1) day after deposit with a nationally recognized overnight courier, specifying next day delivery, with written verification of receipt. All communications shall be sent as follows: If to the Company, to: Epixtar Corp. 11900 Biscayne Boulevard, Suite 262 Miami, Florida 33181 Attention: David Srour Facsimile: 305-503-8610 with a copy to: Michael DiGiovanna, Esq. 212 Carnegie Center Suite 206 Princeton, New Jersey 08540 Facsimile: 609-452-9473 28 If to the Purchaser, to: Laurus Master Fund, Ltd. c/o Ironshore Corporate Services ltd. P.O. Box 1234 G.T. Queensgate House, South Church Street Grand Cayman, Cayman Islands Facsimile: 345-949-9877 with a copy to: John E. Tucker, Esq. 825 Third Avenue 14th Floor New York, NY 10022 Facsimile: 212-541-4434 or at such other address as the Company or the Purchaser may designate by written notice to the other parties hereto given in accordance herewith. 11.9 Attorneys' Fees. In the event that any suit or action is instituted to enforce any provision in this Agreement, the prevailing party in such dispute shall be entitled to recover from the losing party all fees, costs and expenses of enforcing any right of such prevailing party under or with respect to this Agreement, including, without limitation, such reasonable fees and expenses of attorneys and accountants, which shall include, without limitation, all fees, costs and expenses of appeals. 11.10 Titles and Subtitles. The titles of the sections and subsections of this Agreement are for convenience of reference only and are not to be considered in construing this Agreement. 11.11 Facsimile Signatures; Counterparts. This Agreement may be executed by facsimile signatures and in any number of counterparts, each of which shall be an original, but all of which together shall constitute one instrument. 11.12 Broker's Fees. Except as set forth on Schedule 11.12 hereof, each party hereto represents and warrants that no agent, broker, investment banker, person or firm acting on behalf of or under the authority of such party hereto is or will be entitled to any broker's or finder's fee or any other commission directly or indirectly in connection with the transactions contemplated herein. Each party hereto further agrees to indemnify each other party for any claims, losses or expenses incurred by such other party as a result of the representation in this Section 11.12 being untrue. 11.13 Construction. Each party acknowledges that its legal counsel participated in the preparation of this Agreement and the Related Agreements and, therefore, stipulates that the rule of construction that ambiguities are to be resolved against the drafting party shall not be applied in the interpretation of this Agreement to favor any party against the other. 29 [THE REMAINDER OF THIS PAGE IS INTENTIONALLY LEFT BLANK 30 IN WITNESS WHEREOF, the parties hereto have executed the SECURITIES PURCHASE AGREEMENT as of the date set forth in the first paragraph hereof. COMPANY: PURCHASER: EPIXTAR CORP. LAURUS MASTER FUND, LTD. By: By: ----------------------------- --------------------------------- Name: Name: ----------------------------- --------------------------------- Title: Title: ----------------------------- --------------------------------- 31 EXHIBIT A FORM OF CONVERTIBLE NOTE A-1 EXHIBIT B FORM OF WARRANTS B-1 Exhibit C C-1 EXHIBIT D FORM OF ESCROW AGREEMENT D-1 EX-4.11.2 4 b332632_ex411-2.txt FORM OF LAURUS SECURED CONVERTIBLE TERM NOTE Exhibit 4.11.2 THIS NOTE AND THE COMMON SHARES ISSUABLE UPON CONVERSION OF THIS NOTE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR ANY STATE SECURITIES LAWS. THIS NOTE AND THE COMMON SHARES ISSUABLE UPON CONVERSION OF THIS NOTE MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED OR HYPOTHECATED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT AS TO THIS NOTE UNDER SAID ACT AND ANY APPLICABLE STATE SECURITIES LAWS OR AN OPINION OF COUNSEL REASONABLY SATISFACTORY TO EPIXTAR CORP. THAT SUCH REGISTRATION IS NOT REQUIRED. SECURED CONVERTIBLE TERM NOTE FOR VALUE RECEIVED, EPIXTAR CORP., a Florida corporation (the "BORROWER"), hereby promises to pay to LAURUS MASTER FUND, LTD., c/o Ironshore Corporate Services Ltd., P.O. Box 1234 G.T., Queensgate House, South Church Street, Grand Cayman, Cayman Islands, Fax: 345-949-9877 (the "HOLDER") or its registered assigns or successors in interest, on order, the sum of Five Million Dollars ($5,000,000), together with any accrued and unpaid interest hereon, on May 14, 2007 (the "MATURITY DATE") if not sooner paid. Capitalized terms used herein without definition shall have the meanings ascribed to such terms in that certain Securities Purchase Agreement dated as of the date hereof between the Borrower and the Holder (the "PURCHASE AGREEMENT"). The following terms shall apply to this Note: ARTICLE I INTEREST & AMORTIZATION 1.1 Interest Rate. Subject to Sections 4.11 and 5.6 hereof, (x) interest payable on the portion of the Principal Amount (as defined below) of this Note not maintained in the Laurus Restricted Account shall accrue at a rate per annum (the "Unrestricted Interest Rate") equal to the "prime rate" published in The Wall Street Journal from time to time, plus two and one half percent (2.50%) and (y) payable on the portion of the Principal Amount maintained in the Laurus Restricted Account shall be equal to 1% per annum (the "Restricted Interest Rate" and, together with the Unrestricted Interest Rate, the "Interest Rate") until such time any portion of such amount maintained in the Laurus Restricted Account is released for any reason (other than as a result of a conversion of the Monthly Principal Amount into Common Stock in accordance with Article II or III below) at which time such released portion shall bear interest set forth in the foregoing clause (x) of this Section 1.1. The prime rate shall be increased or decreased as the case may be for each increase or decrease in the prime rate in an amount equal to such increase or decrease in the prime rate; each change to be effective as of the day of the change in such rate. The Interest Rate shall not be greater than eight percent (8.0%) per annum. Interest shall be (i) calculated on the basis of a 360 day year and (ii) payable (x) in the case of interest that accrues at the Unrestricted Interest Rate, monthly, in arrears, commencing on June 1, 2004 and on the first business day of each consecutive calendar month thereafter until the Maturity Date (and on the Maturity Date), whether by acceleration or otherwise and (y) in the case of interest that accrues at the Restricted Interest Rate, on the Maturity Date or, in the event that all or any portion of the Principal Amount is released from the Laurus Restricted Account prior to the Maturity Date, on the first business day of the calendar month that occurs immediately following the release of the related portion of the Principal Amount from the Laurus Restricted Account (the preceding clauses (x) and (y), each, a "REPAYMENT DATE"). 1 1.2 Minimum Monthly Principal Payments. Amortizing payments of the aggregate principal amount outstanding under this Note at any time (the "PRINCIPAL AMOUNT") shall begin on October 1, 2004 and shall recur on the first business day of each succeeding month thereafter until the Maturity Date (each, an "AMORTIZATION DATE"). Subject to Article 3 below, beginning on the first Amortization Date, the Borrower shall make monthly payments to the Holder on each Repayment Date, each in the amount of $90,909.09 (the "MONTHLY PRINCIPAL AMOUNT"), together with any accrued and unpaid interest to date on such portion of the Principal Amount (as defined below) plus any and all other amounts which are then owing under this Note, the Purchase Agreement or any other Related Agreement but have not been paid (the Monthly Principal Amount, together with such accrued and unpaid interest and such other amounts, collectively, the "MONTHLY AMOUNT"). In addition, in the event that any funds are released from the Laurus Restricted Account (as defined in the Laurus Restricted Account Agreement) for any reason other than as a result of a conversion of the Monthly Principal Amount into Common Stock in accordance with Article II or III below, the amount of such release shall be applied in equal amounts to each future Amortization Date occurring after the 90th day following such release. Any Principal Amount that remains outstanding on the Maturity Date shall be due and payable on the Maturity Date. ARTICLE II CONVERSION REPAYMENT 2.1 Payment of Monthly Amount in Cash or Common Stock. (a) Each month by the fifth (5th) business day prior to each Amortization Date (the "NOTICE DATE"), the Holder shall deliver to Borrower a written notice in the form of Exhibit B attached hereto converting the Monthly Amount payable on the next Amortization Date or Repayment Date, as the case may be, in either cash or Common Stock, or a combination of both (each, a "REPAYMENT NOTICE"). If a Repayment Notice is not delivered by the Holder on or before the applicable Notice Date for such Amortization Date (or is not required to be delivered in accordance with Section 2.1(b)), then the Borrower shall pay the Monthly Amount due on such Amortization Date in cash. Any portion of the Monthly Amount paid in cash on a Amortization Date or Repayment Date, as the case may be, shall be paid to the Holder an amount equal to 102% of the principal portion of the Monthly Amount due and owing to Holder on such Amortization Date or Repayment Date. If the Holder converts all or a portion of the Monthly Amount in shares of Common Stock as provided herein, the number of such shares to be issued by the Borrower to the Holder on such Amortization Date or Repayment Date, as the case may be, shall be the number determined by dividing (x) the portion of the Monthly Amount to be paid in shares of Common Stock, by (y) the then applicable Fixed Conversion Price. For purposes hereof, the initial "FIXED CONVERSION PRICE" means $2.96. 2 (b) Monthly Amount Conversion Guidelines. Subject to Sections 2.1(a), 2.2, and 3.2 hereof, the Holder shall convert all or a portion of the Monthly Amount due on each Repayment Date in shares of Common Stock if the average closing price of the Common Stock as reported by Bloomberg, L.P. on the Principal Market for the five (5) trading days immediately preceding such Repayment Date was greater than or equal to 110% of the Fixed Conversion Price, provided, however, that such conversions shall not exceed twenty five percent (25%) of the aggregate dollar trading volume of the Common Stock for the five (5) day trading period immediately preceding delivery of a Notice of Conversion to the Borrower. Any part of the Monthly Amount due on a Amortization Date or Repayment Date, as the case may be, that the Holder has not converted into shares of Common Stock shall be paid by the Borrower in cash on such Amortization Date or Repayment Date. Any part of the Monthly Amount due on such Amortization Date or Repayment Date which must be paid in cash (as a result of the closing price of the Common Stock on one or more of the five (5) trading days preceding the applicable Amortization Date or Repayment Date being less than 110% of the Fixed Conversion Price) shall be paid in cash at the rate of 102% of the Monthly Amount otherwise due on such Amortization Date or Repayment Date, within three (3) business days of the applicable Amortization Date or Repayment Date. 2.2 No Effective Registration. Notwithstanding anything to the contrary herein, none of the Borrower's obligations to the Holder may be converted into Common Stock unless (i) either (x) an effective current Registration Statement (as defined in the Registration Rights Agreement) covering the resale of the shares of Common Stock to be issued in connection with satisfaction of such obligations exists or (y) an exemption from registration of the Common Stock (with respect to the resale of such Common Stock) is available to pursuant to Rule 144 of the Securities Act and (ii) no Event of Default hereunder exists and is continuing, unless such Event of Default is cured within any applicable cure period or is otherwise waived in writing by the Holder in whole or in part at the Holder's option. 2.3 Optional Redemption in Cash. The Borrower will have the option of prepaying this Note ("OPTIONAL REDEMPTION") by paying to the Holder a sum of money equal to one hundred thirty percent (130%) of the principal amount of this Note together with accrued but unpaid interest thereon and any and all other sums due, accrued or payable to the Holder arising under this Note, the Purchase Agreement or any Related Agreement (the "REDEMPTION AMOUNT") outstanding on the day written notice of redemption (the "NOTICE OF REDEMPTION") is given to the Holder. The Notice of Redemption shall specify the date for such Optional Redemption (the "REDEMPTION PAYMENT DATE") which date shall be seven (7) business days after the date of the Notice of Redemption (the "REDEMPTION PERIOD"). A Notice of Redemption shall not be effective with respect to any portion of this Note for which the Holder has a pending election to convert pursuant to Section 3.1, or for conversions initiated or made by the Holder pursuant to Section 3.1 during the Redemption Period. The Redemption Amount shall be determined as if such Holder's conversion elections had been completed immediately prior to the date of the Notice of Redemption. On the Redemption Payment Date, the Redemption Amount must be paid in good funds to the Holder. In the event the Borrower fails to pay the Redemption Amount on the Redemption Payment Date as set forth herein, then such Redemption Notice will be null and void. 3 ARTICLE III CONVERSION RIGHTS 3.1. Holder's Conversion Rights. The Holder shall have the right, but not the obligation, to convert all or any portion of the then aggregate outstanding principal amount of this Note, together with interest and fees due hereon, into shares of Common Stock subject to the terms and conditions set forth in this Article III. The Holder may exercise such right by delivery to the Borrower of a written notice of conversion not less than one (1) day prior to the date upon which such conversion shall occur. 3.2 Conversion Limitation. Notwithstanding anything contained herein to the contrary, the Holder shall not be entitled to convert pursuant to the terms of this Note an amount that would be convertible into that number of Conversion Shares which would exceed the difference between the number of shares of Common Stock beneficially owned by such Holder or issuable upon exercise of warrants held by such Holder and 4.99% of the outstanding shares of Common Stock of the Borrower. For the purposes of the immediately preceding sentence, beneficial ownership shall be determined in accordance with Section 13(d) of the Exchange Act and Regulation 13d-3 thereunder. The Holder may void the Conversion Share limitation described in this Section 3.2 upon 75 days prior notice to the Borrower or without any notice requirement upon an Event of Default. 3.3 Mechanics of Holder's Conversion. (a) In the event that the Holder elects to convert this Note into Common Stock, the Holder shall give notice of such election by delivering an executed and completed notice of conversion ("NOTICE OF CONVERSION") to the Borrower and such Notice of Conversion shall provide a breakdown in reasonable detail of the Principal Amount, accrued interest and fees being converted. On each Conversion Date (as hereinafter defined) and in accordance with its Notice of Conversion, the Holder shall make the appropriate reduction to the Principal Amount, accrued interest and fees as entered in its records and shall provide written notice thereof to the Borrower within two (2) business days after the Conversion Date. Each date on which a Notice of Conversion is delivered or telecopied to the Borrower in accordance with the provisions hereof shall be deemed a Conversion Date (the "CONVERSION DATE"). A form of Notice of Conversion to be employed by the Holder is annexed hereto as Exhibit A. 4 (b) Pursuant to the terms of the Notice of Conversion, the Borrower will issue instructions to the transfer agent accompanied by an opinion of counsel within one (1) business day of the date of the delivery to Borrower of the Notice of Conversion and shall cause the transfer agent to transmit the certificates representing the Conversion Shares to the Holder by crediting the account of the Holder's designated broker with the Depository Trust Corporation ("DTC") through its Deposit Withdrawal Agent Commission ("DWAC") system within three (3) business days after receipt by the Borrower of the Notice of Conversion (the "DELIVERY DATE"). In the case of the exercise of the conversion rights set forth herein the conversion privilege shall be deemed to have been exercised and the Conversion Shares issuable upon such conversion shall be deemed to have been issued upon the date of receipt by the Borrower of the Notice of Conversion. The Holder shall be treated for all purposes as the record holder of such Common Stock, unless the Holder provides the Borrower written instructions to the contrary. 3.4 Conversion Mechanics. (a) The number of shares of Common Stock to be issued upon each conversion of this Note shall be determined by dividing that portion of the principal and interest and fees to be converted, if any, by the then applicable Fixed Conversion Price. In the event of any conversions of outstanding principal amount under this Note in part pursuant to this Article III, such conversions shall be deemed to constitute conversions of outstanding principal amount applying to Monthly Amounts for the remaining Amortization Dates in chronological order. (b) The Fixed Conversion Price and number and kind of shares or other securities to be issued upon conversion is subject to adjustment from time to time upon the occurrence of certain events, as follows: A. Stock Splits, Combinations and Dividends. If the shares of Common Stock are subdivided or combined into a greater or smaller number of shares of Common Stock, or if a dividend is paid on the Common Stock in shares of Common Stock, the Fixed Conversion Price or the Conversion Price, as the case may be, shall be proportionately reduced in case of subdivision of shares or stock dividend or proportionately increased in the case of combination of shares, in each such case by the ratio which the total number of shares of Common Stock outstanding immediately after such event bears to the total number of shares of Common Stock outstanding immediately prior to such event. B. During the period the conversion right exists, the Borrower will reserve from its authorized and unissued Common Stock a sufficient number of shares to provide for the issuance of Common Stock upon the full conversion of this Note. The Borrower represents that upon issuance, such shares will be duly and validly issued, fully paid and non-assessable. The Borrower agrees that its issuance of this Note shall constitute full authority to its officers, agents, and transfer agents who are charged with the duty of executing and issuing stock certificates to execute and issue the necessary certificates for shares of Common Stock upon the conversion of this Note. 5 C. Share Issuances. Subject to the provisions of this Section 3.4, if the Borrower shall at any time prior to the conversion or repayment in full of the Principal Amount issue any shares of Common Stock or securities convertible into Common Stock to a person other than the Holder (except (i) pursuant to Subsections A or B above; (ii) pursuant to options, warrants, or other obligations to issue shares outstanding on the date hereof as disclosed to Holder in writing; or (iii) pursuant to options that may be issued under any employee incentive stock option and/or any qualified stock option plan adopted by the Borrower) for a consideration per share (the "Offer Price") less than the Fixed Conversion Price in effect at the time of such issuance (an such issuance, an "Offering"), then the Fixed Conversion Price shall be immediately reset to such lower Offer Price at the time of issuance of such securities pursuant to the formula below. For purposes hereof, the issuance of any security of the Borrower convertible into or exercisable or exchangeable for Common Stock shall result in an adjustment to the Fixed Conversion Price at the time of issuance of such securities. If the Borrower issues any additional shares pursuant to Section 3.4 above then, and thereafter successively upon each such issue, the Fixed Conversion Price shall be adjusted by multiplying the then applicable Fixed Conversion Price by the following fraction: ---------------------------------------- | | | A + B | ---------------------------------------- | | | (A + B) + [((C - D) x B) / C] | ---------------------------------------- A = Total amount of shares convertible pursuant to this Note, the Purchase Agreement and the Related Agreements. B = Actual shares sold in the Offering C = Fixed Conversion Price D = Offering price D. Reclassification, etc. If the Borrower at any time shall, by reclassification or otherwise, change the Common Stock into the same or a different number of securities of any class or classes, this Note, as to the unpaid Principal Amount and accrued interest thereon, shall thereafter be deemed to evidence the right to purchase an adjusted number of such securities and kind of securities as would have been issuable as the result of such change with respect to the Common Stock immediately prior to such reclassification or other change. 3.5 Issuance of New Note. Upon any partial conversion of this Note, a new Note containing the same date and provisions of this Note shall, at the request of the Holder, be issued by the Borrower to the Holder for the principal balance of this Note and interest which shall not have been converted or paid. The Borrower will pay no costs, fees or any other consideration to the Holder for the production and issuance of a new Note. 6 ARTICLE IV EVENTS OF DEFAULT Upon the occurrence and continuance of an Event of Default beyond any applicable grace period, the Holder may make all sums of principal, interest and other fees then remaining unpaid hereon and all other amounts payable hereunder immediately due and payable. In the event of such an acceleration, within five (5) days after written notice from Holder to Borrower (each occurrence being a "DEFAULT NOTICE PERIOD") the amount due and owing to the Holder shall be 110% of the outstanding principal amount of the Note (plus accrued and unpaid interest and fees, if any) (the "DEFAULT PAYMENT"). If, with respect to any Event of Default, the Borrower cures the Event of Default, the Event of Default will be deemed to no longer exist and any rights and remedies of Holder pertaining to such Event of Default will be of no further force or effect. The Default Payment shall be applied first to any fees due and payable to Holder pursuant to the Note or the Related Agreements, then to accrued and unpaid interest due on the Note and then to outstanding principal balance of the Note. The occurrence of any of the following events set forth in Sections 4.1 through 4.12, inclusive, is an "EVENT OF DEFAULT": 4.1 Failure to Pay Principal, Interest or other Fees. The Borrower fails to pay when due any installment of principal, interest or other fees hereon in accordance herewith, or the Borrower fails to pay when due any amount due under any other promissory note issued by Borrower, and in any such case, such failure shall continue for a period of five (5) days following the date upon which any such payment was due. 4.2 Breach of Covenant. The Borrower breaches any covenant or any other term or condition of this Note or the Purchase Agreement in any material respect, or the Borrower or any of its Subsidiaries breaches any covenant or any other term or condition of any Related Agreement in any material respect and, any such case, such breach, if subject to cure, continues for a period of thirty (30) days after the occurrence thereof. 4.3 Breach of Representations and Warranties. Any representation or warranty made by the Borrower in this Note or the Purchase Agreement, or by the Borrower or any of its Subsidiaries in any Related Agreement, shall, in any such case, be false or misleading in any material respect on the date that such representation or warranty was made or deemed made. 4.4 Receiver or Trustee. The Borrower or any of its Subsidiaries shall make an assignment for the benefit of creditors, or apply for or consent to the appointment of a receiver or trustee for it or for a substantial part of its property or business; or such a receiver or trustee shall otherwise be appointed. 4.5 Judgments. Any money judgment, writ or similar final process shall be entered or filed against the Borrower or any of its Subsidiaries or any of their respective property or other assets for more than $75,000, and shall remain unvacated, unbonded or unstayed for a period of thirty (30) days. 7 4.6 Bankruptcy. Bankruptcy, insolvency, reorganization or liquidation proceedings or other proceedings or relief under any bankruptcy law or any law for the relief of debtors shall be instituted by or against the Borrower or any of its Subsidiaries and if commenced against the Borrower or any such Subsidiary shall not be dismissed within forty-five (45) days. 4.7 Stop Trade. An SEC stop trade order or Principal Market trading suspension of the Common Stock shall be in effect for five (5) consecutive days or five (5) days during a period of ten (10) consecutive days, excluding in all cases a suspension of all trading on a Principal Market, provided that the Borrower shall not have been able to cure such trading suspension within thirty (30) days of the notice thereof or list the Common Stock on another Principal Market within sixty (60) days of such notice. The "Principal Market" for the Common Stock shall include the NASD OTC Bulletin Board, NASDAQ SmallCap Market, NASDAQ National Market System, American Stock Exchange, or New York Stock Exchange (whichever of the foregoing is at the time the principal trading exchange or market for the Common Stock, or any securities exchange or other securities market on which the Common Stock is then being listed or traded. 4.8 Failure to Deliver Common Stock or Replacement Note. The Borrower shall fail (i) to timely deliver Common Stock to the Holder pursuant to and in the form required by this Note, and Section 9 of the Purchase Agreement, if such failure to timely deliver Common Stock shall not be cured within two (2) business days or (ii) to deliver a replacement Note to Holder within seven (7) business days following the required date of such issuance pursuant to this Note, the Purchase Agreement or any Related Agreement (to the extent required under such agreements). 4.9 Default Under Related Agreements or Other Agreements. The occurrence and continuance of any Event of Default (as defined in any Related Agreement) or any event of default (or similar term) under any other indebtedness. 4.10 Change in Control. The occurrence of a change in the controlling ownership of the Borrower. 4.11 Federal Trade Commission Action. The Federal Trade Commission or any other governmental agency shall commence any action against the Borrower or any or its Subsidiaries, the effect of any such action, or any judgment, order or settlement resulting therefrom, on the Borrower or any such Subsidiary is to restrain or deprive the Borrower and its Subsidiaries from utilizing any substantial portion of their assets determined on a consolidated basis. 4.12 Refinancing of Wedge Indebtedness. Any amount of indebtedness shall remain outstanding under the Wedge Documents (including, without limitation, principal, interest and fees associated with such indebtedness) on or after June 4, 2004. DEFAULT RELATED PROVISIONS 4.13 Payment Grace Period. Following the occurrence and continuance of an Event of Default beyond any applicable cure period hereunder, the Borrower shall pay the Holder a default interest rate of two percent (2%) per month on all amounts due and owing under the Note, which default interest shall be payable upon demand. 8 4.14 Conversion Privileges. The conversion privileges set forth in Article III shall remain in full force and effect immediately from the date hereof and until this Note is paid in full. 4.15 Cumulative Remedies. The remedies under this Note shall be cumulative. ARTICLE V MISCELLANEOUS 5.1 Failure or Indulgence Not Waiver. No failure or delay on the part of the Holder hereof in the exercise of any power, right or privilege hereunder shall operate as a waiver thereof, nor shall any single or partial exercise of any such power, right or privilege preclude other or further exercise thereof or of any other right, power or privilege. All rights and remedies existing hereunder are cumulative to, and not exclusive of, any rights or remedies otherwise available. 5.2 Notices. Any notice herein required or permitted to be given shall be in writing and shall be deemed effectively given: (a) upon personal delivery to the party notified, (b) when sent by confirmed telex or facsimile if sent during normal business hours of the recipient, if not, then on the next business day, (c) five days after having been sent by registered or certified mail, return receipt requested, postage prepaid, or (d) one day after deposit with a nationally recognized overnight courier, specifying next day delivery, with written verification of receipt. All communications shall be sent to the Borrower at the address provided in the Purchase Agreement executed in connection herewith, and to the Holder at the address provided in the Purchase Agreement for such Holder, with a copy to John E. Tucker, Esq., 825 Third Avenue, 14th Floor, New York, New York 10022, facsimile number (212) 541-4434, or at such other address as the Borrower or the Holder may designate by ten days advance written notice to the other parties hereto. A Notice of Conversion shall be deemed given when made to the Borrower pursuant to the Purchase Agreement. 5.3 Amendment Provision. The term "Note" and all reference thereto, as used throughout this instrument, shall mean this instrument as originally executed, or if later amended or supplemented, then as so amended or supplemented, and any successor instrument issued pursuant to Section 3.5 hereof, as it may be amended or supplemented. 5.4 Assignability. This Note shall be binding upon the Borrower and its successors and assigns, and shall inure to the benefit of the Holder and its successors and assigns, and may be assigned by the Holder in accordance with the requirements of the Purchase Agreement. This Note shall not be assigned by the Borrower without the consent of the Holder. 9 5.5 Governing Law. This Note shall be governed by and construed in accordance with the laws of the State of New York, without regard to principles of conflicts of laws. Except as set forth below in this Section 5.5, any and all disputes, controversies and claims that the Borrower or any of its Subsidiaries may assert against the Holder arising out of or relating to this Note, the Purchase Agreement or any other Related Agreement shall be determined exclusively by arbitration (each such arbitration, an "Arbitration") in New York City before a panel of three neutral arbitrators agreed to by the Holder and the Borrower (collectively, the "Arbitrators") in accordance with and pursuant to the then existing commercial arbitration rules of the American Arbitration Association. The Borrower (on its behalf and on behalf of its subsidiaries) hereby irrevocably waives any right to assert such claims in any other forum. The Arbitrators shall have the power in their discretion to award specific performance or injunctive relief (but shall not have the power to render any incidental, special or punitive damages) and reasonable attorneys' fees and expenses to any party in any arbitration. The Arbitrators may not change, modify or alter any express condition, term or provision of this Note, the Purchase Agreement or of any other Related Agreement nor shall they have the power to render any award against the Holder that would have such effect. Each Arbitration award shall be final and binding upon the parties subject thereto and judgment may be entered thereon in any court of competent jurisdiction. The service of any notice, process, motion or other document in connection with an Arbitration or for the enforcement of any Arbitration award may be made in the same manner as communications may be given under Section 5.2 hereof. Notwithstanding the foregoing, the provisions of this Section 5.5 nor any other provision contained in this Note, the Purchase Agreement or in any other Related Agreement shall limit in any manner whatsoever the Holder's right to commence an action against or in connection with the Borrower, any of its Subsidiaries or their respective properties in any court of competent jurisdiction or otherwise utilize judicial process in connection with or arising out of the Holder's rights and remedies under this Note, the Purchase Agreement and/or any Related Agreement or otherwise (any such action, a "Court Action"). Court Actions may be brought by the Holder in any state or federal court of competent jurisdiction and the Borrower (on its behalf and on behalf of its Subsidiaries) irrevocably submits to the jurisdiction of such state and federal courts and irrevocably waives any claim or defense of inconvenient forum or lack of personal jurisdiction in such forum or right of removal or right to jury trial under any applicable law or decision or otherwise. Service of any notice, process, motion or other document in connection with a Court Action may be made in the same manner as communications may be given under Section 5.2. In addition, the Holder may serve process in any other manner permitted under applicable law. The prevailing party shall be entitled to recover from the other party its reasonable attorney's fees and costs. In the event that any provision of this Note is invalid or unenforceable under any applicable statute or rule of law, then such provision shall be deemed inoperative to the extent that it may conflict therewith and shall be deemed modified to conform with such statute or rule of law. Any such provision which may prove invalid or unenforceable under any law shall not affect the validity or unenforceability of any other provision of this Note. Nothing contained herein shall be deemed or operate to preclude the Holder from bringing suit or taking other legal action against the Borrower in any other jurisdiction to collect on the Borrower's obligations to Holder, to realize on any collateral or any other security for such obligations, or to enforce a judgment or other court in favor of the Holder. 10 5.6 Maximum Payments. Nothing contained herein shall be deemed to establish or require the payment of a rate of interest or other charges in excess of the maximum permitted by applicable law. In the event that the rate of interest required to be paid or other charges hereunder exceed the maximum permitted by such law, any payments in excess of such maximum shall be credited against amounts owed by the Borrower to the Holder and thus refunded to the Borrower. 5.7 Security Interest and Guarantee. The Holder has been granted a security interest (i) in certain assets of the Borrower and its Subsidiaries as more fully described in the Master Security Agreement dated as of the date hereof and (ii) pursuant to the Stock Pledge Agreement dated as of the date hereof. The obligations of the Borrower under this Note are guaranteed by certain Subsidiaries of the Borrower pursuant to the Subsidiary Guaranty dated as of the date hereof. 5.8 Construction. Each party acknowledges that its legal counsel participated in the preparation of this Note and, therefore, stipulates that the rule of construction that ambiguities are to be resolved against the drafting party shall not be applied in the interpretation of this Note to favor any party against the other. 5.9 Cost of Collection. If default is made in the payment of this Note, the Borrower shall pay to Holder reasonable costs of collection, including reasonable attorney's fees. [Balance of page intentionally left blank; signature page follows.] 11 IN WITNESS WHEREOF, the Borrower has caused this Convertible Term Note to be signed in its name effective as of this 14th day of May, 2004. EPIXTAR CORP. By:__________________________________ Name:________________________________ Title:_______________________________ WITNESS: - ------------------------------- 12 EXHIBIT A NOTICE OF CONVERSION (To be executed by the Holder in order to convert all or part of the Note into Common Stock [Name and Address of Holder] The Undersigned hereby converts $_________ of the principal due on [specify applicable Repayment Date] under the Convertible Term Note issued by Epixtar Corp. dated May 14, 2004 by delivery of Shares of Common Stock of Epixtar Corp. on and subject to the conditions set forth in Article III of such Note. 1. Date of Conversion _______________________ 2. Shares To Be Delivered: _______________________ By:_______________________________ Name:_____________________________ Title:____________________________ 13 EXHIBIT B CONVERSION NOTICE (To be executed by the Holder in order to convert all or part of a Monthly Amount into Common Stock) [Name and Address of Holder] Holder hereby converts $_________ of the Monthly Amount due on [specify applicable Repayment Date] under the Convertible Term Note issued by Epixtar Corp. dated May 14, 2004 by delivery of Shares of Common Stock of Epixtar Corp. on and subject to the conditions set forth in Article III of such Note. 1. Fixed Conversion Price: $_______________________ 2. Amount to be paid: $_______________________ 3. Shares To Be Delivered (2 divided by 1): ______________________ 4. Cash payment to be made by Borrower: $_____________________ Date: ____________ LAURUS MASTER FUND, LTD. By:________________________________ Name:______________________________ Title:_____________________________ 14 EX-4.11.3 5 b332632_ex411-3.txt MASTER SECURITY AGREEMENT Exhibit 4.11.3 EPIXTAR CORP. AND CERTAIN OF ITS SUBSIDIARIES MASTER SECURITY AGREEMENT To: Laurus Master Fund, Ltd. c/o Ironshore Corporate Services, Ltd. P.O. Box 1234 G.T Queensgate House South Church Street Grand Cayman, Cayman Islands Date: May 14, 2004 To Whom It May Concern: 1. To secure the payment of all Obligations (as hereafter defined), Epixtar Corp., a Florida corporation (the "Company"), each of the other undersigned parties (other than Laurus Master Fund, Ltd, "Laurus")) and each other entity that is required to enter into this Master Security Agreement (each an "Assignor" and, collectively, the "Assignors") hereby assigns and grants to Laurus a continuing security interest in all of the following property now owned or at any time hereafter acquired by any Assignor, or in which any Assignor now have or at any time in the future may acquire any right, title or interest (the "Collateral"): all cash, cash equivalents, accounts, deposit accounts (including, without limitation, (x) the Restricted Account (the "Laurus Restricted Account") maintained at North Fork Bank (Account Name: Epixtar Corp., Account Number: 2704051586) referred to in the Laurus Restricted Account Agreement and (y) (x) the Restricted Account (the "Reserve Restricted Account") maintained at North Fork Bank (Account Name: Epixtar Corp., Account Number: 2704051594)), inventory, equipment, goods, documents, instruments (including, without limitation, promissory notes), contract rights, general intangibles (including, without limitation, payment intangibles and an absolute right to license on terms no less favorable than those current in effect among our affiliates), chattel paper, supporting obligations, investment property (including, without limitation, all equity interests owned by any Assignor), letter-of-credit rights, trademarks, trademark applications, patents, patent applications, copyrights, copyright applications and tradestyles, in each case, in which any Assignor now have or hereafter may acquire any right, title or interest, all proceeds and products thereof (including, without limitation, proceeds of insurance) and all additions, accessions and substitutions thereto or therefore. In the event any Assignor wishes to finance the acquisition in the ordinary course of business of any hereafter acquired equipment and have obtained a commitment from a financing source to finance such equipment from an unrelated third party, Laurus agrees to release its security interest on such hereafter acquired equipment so financed by such third party financing source. Except as otherwise defined herein, all capitalized terms used herein shall have the meaning provided such terms in the Securities Purchase Agreement referred to below. 2. The term "Obligations" as used herein shall mean and include all debts, liabilities and obligations owing by each Assignor to Laurus arising under, out of, or in connection with: (i) that certain Securities Purchase Agreement dated as of the date hereof by and between the Company and Laurus (the "Securities Purchase Agreement") and (ii) the Related Agreements referred to in the Securities Purchase Agreement (the Securities Purchase Agreement and each Related Agreement, as each may be amended, modified, restated or supplemented from time to time, are collectively referred to herein as the "Documents"), and in connection with any documents, instruments or agreements relating to or executed in connection with the Documents or any documents, instruments or agreements referred to therein or otherwise, and in connection with any other indebtedness, obligations or liabilities of any Assignor to Laurus, whether now existing or hereafter arising, direct or indirect, liquidated or unliquidated, absolute or contingent, due or not due and whether under, pursuant to or evidenced by a note, agreement, guaranty, instrument or otherwise, in each case, irrespective of the genuineness, validity, regularity or enforceability of such Obligations, or of any instrument evidencing any of the Obligations or of any collateral therefor or of the existence or extent of such collateral, and irrespective of the allowability, allowance or disallowance of any or all of the Obligations in any case commenced by or against any Assignor under Title 11, United States Code, including, without limitation, obligations or indebtedness of each Assignor for post-petition interest, fees, costs and charges that would have accrued or been added to the Obligations but for the commencement of such case, irrespective of the allowability, allowance or disallowance of such post-petition interest, fees, costs and charges. 3. Each Assignor hereby jointly and severally represents, warrants and covenants to Laurus that: (a) it is a corporation, partnership or limited liability company, as the case may be, validly existing, in good standing and organized under the respective laws of its jurisdiction of organization set forth on Schedule A, and each Assignor will provide Laurus thirty (30) days' prior written notice of any change in any of its respective jurisdiction of organization; (b) its legal name is as set forth in its respective Certificate of Incorporation or other organizational document (as applicable) as amended through the date hereof and as set forth on Schedule A, and it will provide Laurus thirty (30) days' prior written notice of any change in its legal name; (c) its organizational identification number (if applicable) is as set forth on Schedule A hereto, and it will provide Laurus thirty (30) days' prior written notice of any change in any of its organizational identification number; (d) it is the lawful owner of the respective Collateral and it has the sole right to grant a security interest therein and will defend the Collateral against all claims and demands of all persons and entities; 2 (e) it will keep its respective Collateral free and clear of all attachments, levies, taxes, liens, security interests and encumbrances of every kind and nature ("Encumbrances"), except (i) Encumbrances securing the Obligations and the obligations under the Bridge Loan Documents, (ii) to the extent said Encumbrance does not secure indebtedness in excess of $100,000 and such Encumbrance is removed or otherwise released within thirty (30) days of the creation thereof, (iii) liens of warehousemen, mechanics, materialmen, workers, repairmen, common carriers, or landlords, liens for taxes, assessments or other governmental charges, and other similar liens arising by operation of law, in each case arising in the ordinary course of business and for amounts that are not yet due and payable or which are being contested in good faith by appropriate proceedings promptly instituted and diligently conducted and for which an adequate reserve or other appropriate provision shall have been made to the extent required by generally accepted accounting principals, (iv) pledges or deposits in connection with workers' compensation, unemployment insurance and other social security legislation and (v) the Encumbrances set forth on Schedule B hereto (the preceding clauses (i) through (iv), collectively, the "Permitted Encumbrances"); (f) it will, at its and the other Assignors joint and several cost and expense keep the Collateral in good state of repair (ordinary wear and tear excepted) and will not waste or destroy the same or any part thereof other than ordinary course discarding of items no longer used or useful in its or such other Assignors' business; (g) it will not without Laurus' prior written consent, sell, exchange, lease or otherwise dispose of the Collateral, whether by sale, lease or otherwise, except (I) as set forth in the accounts receivable factoring documents described on Schedule B hereto (as such documents are in effect on the date hereof) and (II) for the sale of inventory in the ordinary course of business and for the disposition or transfer in the ordinary course of business during any fiscal year of obsolete and worn-out equipment or equipment no longer necessary for its ongoing needs, having an aggregate fair market value of not more than $50,000 and only to the extent that: (i) the proceeds of any such disposition are used to acquire replacement Collateral which is subject to Laurus' first priority perfected security interest, or are used to repay Obligations or to pay general corporate expenses; and (ii) following the occurrence of an Event of Default which continues to exist the proceeds of which are remitted to Laurus to be held as cash collateral for the Obligations; (h) it will insure or cause the Collateral to be insured in Laurus' name against loss or damage by fire, theft, burglary, pilferage, loss in transit and such other hazards as Laurus shall specify in amounts and under policies by insurers acceptable to Laurus and all premiums thereon shall be paid by such Assignor and the policies delivered to Laurus. If any such Assignor fails to do so, Laurus may procure such insurance and the cost thereof shall be promptly reimbursed by the Assignors, jointly and severally, and shall constitute Obligations; (i) it will at all reasonable times, upon reasonable notice and in a reasonable manner, allow Laurus or Laurus' representatives free access to and the right of inspection of the Collateral; 3 (j) such Assignor (jointly and severally with each other Assignor) hereby indemnifies and saves Laurus harmless from all loss, costs, damage, liability and/or expense, including reasonable attorneys' fees, that Laurus may sustain or incur to enforce payment, performance or fulfillment of any of the Obligations and/or in the enforcement of this Master Security Agreement or in the prosecution or defense of any action or proceeding either against Laurus or any Assignor concerning any matter growing out of or in connection with this Master Security Agreement, and/or any of the Obligations and/or any of the Collateral except to the extent caused by Laurus' own gross negligence or willful misconduct (as determined by a court of competent jurisdiction in a final and nonappealable decision). 4. The occurrence of any of the following events or conditions shall constitute an "Event of Default" under this Master Security Agreement: (a) Breach of any covenant, warranty, representation or statement made or furnished to Laurus by any Assignor or on any Assignor's benefit was false or misleading in any material respect when made or furnished, and if subject to cure, shall not be cured for a period of thirty (30) days; (b) the loss, theft, substantial damage, destruction, sale or encumbrance to or of any of the Collateral or the making of any levy, seizure or attachment thereof or thereon except to the extent: (i) such loss is covered by insurance proceeds which are used to replace the item or repay Laurus; or (ii) said levy, seizure or attachment does not secure indebtedness in excess of $100,000 and such levy, seizure or attachment has not been removed or otherwise released within thirty (30) days of the creation or the assertion thereof; (b) any Assignor shall become insolvent, cease operations, dissolve, terminate our business existence, make an assignment for the benefit of creditors, suffer the appointment of a receiver, trustee, liquidator or custodian of all or any part of Assignors' property; (c) any proceedings under any bankruptcy or insolvency law shall be commenced by or against any Assignor and if commenced against any Assignor shall not be dismissed within forty-five (45) days; (d) the Company shall repudiate, purport to revoke or fail to perform any or all of its obligations under the Note (after passage of applicable cure period, if any); or (e) an Event of Default shall have occurred under and as defined in any Document. 4 5. Upon the occurrence of any Event of Default and at any time thereafter, Laurus may declare all Obligations immediately due and payable and Laurus shall have the remedies of a secured party provided in the Uniform Commercial Code as in effect in the State of New York, this Agreement and other applicable law. Upon the occurrence of any Event of Default and at any time thereafter, Laurus will have the right to take possession of the Collateral and to maintain such possession on our premises or to remove the Collateral or any part thereof to such other premises as Laurus may desire. Upon Laurus' request, each of the Assignors shall assemble or cause the Collateral to be assembled and make it available to Laurus at a place designated by Laurus. If any notification of intended disposition of any Collateral is required by law, such notification, if mailed, shall be deemed properly and reasonably given if mailed at least ten (10) days before such disposition, postage prepaid, addressed to any Assignor either at such Assignor's address shown herein or at any address appearing on Laurus' records for such Assignor. Any proceeds of any disposition of any of the Collateral shall be applied by Laurus to the payment of all expenses in connection with the sale of the Collateral, including reasonable attorneys' fees and other legal expenses and disbursements and the reasonable expense of retaking, holding, preparing for sale, selling, and the like, and any balance of such proceeds may be applied by Laurus toward the payment of the Obligations in such order of application as Laurus may elect, and each Assignor shall be liable for any deficiency. For the avoidance of doubt, following the occurrence and during the continuance of an Event of Default, Laurus shall have the immediate right to withdraw any and all monies contained in (x) the Laurus Restricted Account and apply same to the repayment of the Obligations (in such order of application as Laurus may elect) and (y) the Reserve Restricted Account and apply same to the repayment of the Obligations in accordance with the terms of the Intercreditor Agreement. Notwithstanding anything to the contrary contained in this Master Security Agreement, the Purchase Agreement or any Related Agreement, in the event that Laurus exercises the remedies provided for in this Section 5, Laurus agrees to apply the amounts (if any) set forth in each of the Laurus Restricted Account and the Reserve Restricted Account prior to exercising its other remedies provided for in this Section 5. 6. If any Assignor defaults in the performance or fulfillment of any of the terms, conditions, promises, covenants, provisions or warranties on such Assignor's part to be performed or fulfilled under or pursuant to this Master Security Agreement (following any applicable grace period), Laurus may, at its option without waiving its right to enforce this Master Security Agreement according to its terms, immediately or at any time thereafter and without notice to any Assignor, perform or fulfill the same or cause the performance or fulfillment of the same for each Assignor's joint and several account and at each Assignor's joint and several cost and expense, and the cost and expense thereof (including reasonable attorneys' fees) shall be added to the Obligations and shall be payable on demand with interest thereon at the highest rate permitted by law. 7. Each Assignor appoints Laurus, any of Laurus' officers, employees or any other person or entity whom Laurus may designate as our attorney, with power to execute such documents in each of our behalf and to supply any omitted information and correct patent errors in any documents executed by any Assignor or on any Assignor's behalf; to file financing statements against us covering the Collateral (and, in connection with the filing of any such financing statements, describe the Collateral as "all assets and all personal property, whether now owned and/or hereafter acquired" (or any substantially similar variation thereof)); following any Event of Default and any applicable period of grace, to sign our name on public records; and to do all other things Laurus deem necessary to carry out this Master Security Agreement. Each Assignor hereby ratifies and approves all acts of the attorney and neither Laurus nor the attorney will be liable for any acts of commission or omission, nor for any error of judgment or mistake of fact or law other than gross negligence or willful misconduct (as determined by a court of competent jurisdiction in a final and non-appealable decision). This power being coupled with an interest, is irrevocable so long as any Obligations remains unpaid. 5 8. No delay or failure on Laurus' part in exercising any right, privilege or option hereunder shall operate as a waiver of such or of any other right, privilege, remedy or option, and no waiver whatever shall be valid unless in writing, signed by Laurus and then only to the extent therein set forth, and no waiver by Laurus of any default shall operate as a waiver of any other default or of the same default on a future occasion. Laurus' books and records containing entries with respect to the Obligations shall be admissible in evidence in any action or proceeding, shall be binding upon each Assignor for the purpose of establishing the items therein set forth and shall constitute prima facie proof thereof (in the absence of manifest error or fraud). Laurus shall have the right to enforce any one or more of the remedies available to Laurus, successively, alternately or concurrently. Each Assignor agrees to join with Laurus in executing financing statements or other instruments to the extent required by the Uniform Commercial Code in form satisfactory to Laurus and in executing such other documents or instruments as may be required or deemed necessary by Laurus for purposes of affecting or continuing Laurus' security interest in the Collateral. 6 9. This Master Security Agreement shall be governed by and construed in accordance with the laws of the State of New York and cannot be terminated orally. All of the rights, remedies, options, privileges and elections given to Laurus hereunder shall inure to the benefit of Laurus' successors and assigns. The term "Laurus" as herein used shall include Laurus, individually and in its capacity as collateral agent pursuant to the Intercreditor Agreement, any parent of Laurus', any of Laurus' subsidiaries and any co-subsidiaries of Laurus' parent, whether now existing or hereafter created or acquired, and all of the terms, conditions, promises, covenants, provisions and warranties of this Agreement shall inure to the benefit of each of the foregoing, and shall bind the representatives, successors and assigns of each Assignor. Except as set forth below in this Section 9, any and all disputes, controversies and claims that any Assignor may assert against Laurus arising out of or relating to this Master Security Agreement or any other Document shall be determined exclusively by arbitration (each such arbitration, an "Arbitration") in New York City before a panel of three neutral arbitrators agreed to by Laurus and the Company (collectively, the "Arbitrators") in accordance with and pursuant to the then existing commercial arbitration rules of the American Arbitration Association. Each Assignor hereby irrevocably waives any right to assert such claims in any other forum. The Arbitrators shall have the power in their discretion to award specific performance or injunctive relief (but shall not have the power to render any incidental, special or punitive damages) and reasonable attorneys' fees and expenses to any party in any arbitration. The Arbitrators may not change, modify or alter any express condition, term or provision of this Master Security Agreement or of any other Document nor shall they have the power to render any award against Laurus that would have such effect. Each Arbitration award shall be final and binding upon the parties subject thereto and judgment may be entered thereon in any court of competent jurisdiction. The service of any notice, process, motion or other document in connection with an Arbitration or for the enforcement of any Arbitration award may be made in the same manner as communications may be given under Section 10 hereof. Notwithstanding the foregoing, the provisions of this Section 9 nor any other provision contained in this Master Security Agreement or in any other Document shall limit in any manner whatsoever the Laurus' right to commence an action against or in connection with any Assignor or their respective properties in any court of competent jurisdiction or otherwise utilize judicial process in connection with or arising out of Laurus' rights and remedies under this Master Security Agreement and/or any other Document or otherwise (any such action, a "Court Action"). Court Actions may be brought by Laurus in any state or federal court of competent jurisdiction and each Assignor irrevocably submits to the jurisdiction of such state and federal courts and irrevocably waives any claim or defense of inconvenient forum or lack of personal jurisdiction in such forum or right of removal or right to jury trial under any applicable law or decision or otherwise. Service of any notice, process, motion or other document in connection with a Court Action may be made in the same manner as communications may be given under Section 10. In addition, Laurus may serve process in any other manner permitted under applicable law. 10. All notices from Laurus to any Assignor shall be sufficiently given if mailed or delivered to such Assignor's address set forth below. 7 Very truly yours, EPIXTAR CORP. By: ____________________________ Name: Title: Address: 11900 Biscayne Boulevard Suite 262 Miami, Florida 33181 NOL GROUP, INC. By: ____________________________ Name: Title: Address: 11900 Biscayne Boulevard Suite 262 Miami, Florida 33181 NATIONAL ONLINE SERVICES, INC. By: ____________________________ Name: Title: Address: 11900 Biscayne Boulevard Suite 262 Miami, Florida 33181 8 LIBERTY ONLINE SERVICES, INC. By: ____________________________ Name: Title: Address: 11900 Biscayne Boulevard Suite 262 Miami, Florida 33181 AMERIPAGES, INC. By: ____________________________ Name: Title: Address: 11900 Biscayne Boulevard Suite 262 Miami, Florida 33181 B2B ADVANTAGE, INC. By: ____________________________ Name: Title: Address: 11900 Biscayne Boulevard Suite 262 Miami, Florida 33181 9 EPIXTAR BPO SERVICES CORP. By: ____________________________ Name: Title: Address: 11900 Biscayne Boulevard Suite 262 Miami, Florida 33181 10 ACKNOWLEDGED: LAURUS MASTER FUND, LTD. By:_____________________________ Name: Title 11 SCHEDULE A - -------------------------------------------------------------------------------- Entity Jurisdiction of Organization Identification Organization Number - -------------------------------------------------------------------------------- Epixtar Corp. Florida P94000045741 - -------------------------------------------------------------------------------- Ameripages, Inc. Delaware F03000004893 / 3683679 - -------------------------------------------------------------------------------- B2B Advantage, Inc. Delaware F03000004892 / 3683674 - -------------------------------------------------------------------------------- Epixtar BPO Services Corp. Delaware F03000004904 / 3685112 - -------------------------------------------------------------------------------- Liberty Online Services, Inc. Delaware F03000004905 / 3683675 - -------------------------------------------------------------------------------- NOL Group, Inc. Delaware F03000004895 / 3685115 - -------------------------------------------------------------------------------- National Online Services, Inc. Delaware F03000004903 / 3683677 - -------------------------------------------------------------------------------- 12 SCHEDULE B Permitted Liens 13 EX-4.11.4 6 b332632_ex4114.txt FORM OF WARRANT I Exhibit 4.11.4 THIS WARRANT AND THE SHARES OF COMMON STOCK ISSUABLE UPON EXERCISE OF THIS WARRANT HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR ANY STATE SECURITIES LAWS. THIS WARRANT AND THE COMMON STOCK ISSUABLE UPON EXERCISE OF THIS WARRANT MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED OR HYPOTHECATED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT AS TO THIS WARRANT UNDER SAID ACT AND ANY APPLICABLE STATE SECURITIES LAWS OR AN OPINION OF COUNSEL REASONABLY SATISFACTORY TO EPIXTAR CORP. THAT SUCH REGISTRATION IS NOT REQUIRED. Right to Purchase up to 296,296 Shares of Common Stock of Epixtar Corp. -------------- (subject to adjustment as provided herein) COMMON STOCK PURCHASE WARRANT I No. _________________ Issue Date: May 14, 2004 EPIXTAR CORP., a corporation organized under the laws of the State of Florida ("Epixtar"), hereby certifies that, for value received, LAURUS MASTER FUND, LTD., or assigns (the "Holder"), is entitled, subject to the terms set forth below, to purchase from the Company (as defined herein) from and after the Issue Date of this Warrant and at any time or from time to time before 5:00 p.m., New York time, through the close of business May 14, 2011 (the "Expiration Date"), up to 296,296 fully paid and nonassessable shares of Common Stock (as hereinafter defined), $0.001 par value per share, at the applicable Exercise Price per share (as defined below). The number and character of such shares of Common Stock and the applicable Exercise Price per share are subject to adjustment as provided herein. As used herein the following terms, unless the context otherwise requires, have the following respective meanings: (a) The term "Company" shall include Epixtar and any corporation which shall succeed, or assume the obligations of, Epixtar hereunder. (b) The term "Common Stock" includes (i) the Company's Common Stock, par value $0.001 per share; and (ii) any other securities into which or for which any of the securities described in (a) may be converted or exchanged pursuant to a plan of recapitalization, reorganization, merger, sale of assets or otherwise. (c) The term "Other Securities" refers to any stock (other than Common Stock) and other securities of the Company or any other person (corporate or otherwise) which the holder of the Warrant at any time shall be entitled to receive, or shall have received, on the exercise of the Warrant, in lieu of or in addition to Common Stock, or which at any time shall be issuable or shall have been issued in exchange for or in replacement of Common Stock or Other Securities pursuant to Section 4 or otherwise. (d) The "Exercise Price" applicable under this Warrant shall be as follows: (i) a price of $4.05 for the first 164,609 shares acquired hereunder; and (ii) a price of $4.46 for any additional shares acquired hereunder. 1. Exercise of Warrant. 1.1 Number of Shares Issuable upon Exercise. From and after the date hereof through and including the Expiration Date, the Holder shall be entitled to receive, upon exercise of this Warrant in whole or in part, by delivery of an original or fax copy of an exercise notice in the form attached hereto as Exhibit A (the "Exercise Notice"), shares of Common Stock of the Company, subject to adjustment pursuant to Section 4. 1.2 Fair Market Value. For purposes hereof, the "Fair Market Value" of a share of Common Stock as of a particular date (the "Determination Date") shall mean: (a) If the Company's Common Stock is traded on the American Stock Exchange or another national exchange or is quoted on the National or SmallCap Market of The Nasdaq Stock Market, Inc.("Nasdaq"), then the closing or last sale price, respectively, reported for the last business day immediately preceding the Determination Date. (b) If the Company's Common Stock is not traded on the American Stock Exchange or another national exchange or on the Nasdaq but is traded on the NASD OTC Bulletin Board, then the mean of the average of the closing bid and asked prices reported for the last business day immediately preceding the Determination Date. (c) Except as provided in clause (d) below, if the Company's Common Stock is not publicly traded, then as the Holder and the Company agree or in the absence of agreement by arbitration in accordance with the rules then in effect of the American Arbitration Association, before a single arbitrator to be chosen from a panel of persons qualified by education and training to pass on the matter to be decided. (d) If the Determination Date is the date of a liquidation, dissolution or winding up, or any event deemed to be a liquidation, dissolution or winding up pursuant to the Company's charter, then all amounts to be payable per share to holders of the Common Stock pursuant to the charter in the event of such liquidation, dissolution or winding up, plus all other amounts to be payable per share in respect of the Common Stock in liquidation under the charter, assuming for the purposes of this clause (d) that all of the shares of Common Stock then issuable upon exercise of the Warrant are outstanding at the Determination Date. 1.3 Company Acknowledgment. The Company will, at the time of the exercise of the Warrant, upon the request of the holder hereof acknowledge in writing its continuing obligation to afford to such holder any rights to which such holder shall continue to be entitled after such exercise in accordance with the provisions of this Warrant. If the holder shall fail to make any such request, such failure shall not affect the continuing obligation of the Company to afford to such holder any such rights. 2 1.4 Trustee for Warrant Holders. In the event that a bank or trust company shall have been appointed as trustee for the holders of the Warrant pursuant to Subsection 3.2, such bank or trust company shall have all the powers and duties of a warrant agent (as hereinafter described) and shall accept, in its own name for the account of the Company or such successor person as may be entitled thereto, all amounts otherwise payable to the Company or such successor, as the case may be, on exercise of this Warrant pursuant to this Section 1. 2. Procedure for Exercise. 2.1 Delivery of Stock Certificates, Etc., on Exercise. The Company agrees that the shares of Common Stock purchased upon exercise of this Warrant shall be deemed to be issued to the Holder as the record owner of such shares as of the close of business on the date on which this Warrant shall have been surrendered and payment made for such shares in accordance herewith. As soon as practicable after the exercise of this Warrant in full or in part, and in any event within three (3) business days thereafter, the Company at its expense (including the payment by it of any applicable issue taxes) will cause to be issued in the name of and delivered to the Holder, or as such Holder (upon payment by such Holder of any applicable transfer taxes) may direct in compliance with applicable securities laws, a certificate or certificates for the number of duly and validly issued, fully paid and nonassessable shares of Common Stock (or Other Securities) to which such Holder shall be entitled on such exercise, plus, in lieu of any fractional share to which such holder would otherwise be entitled, cash equal to such fraction multiplied by the then Fair Market Value of one full share, together with any other stock or other securities and property (including cash, where applicable) to which such Holder is entitled upon such exercise pursuant to Section 1 or otherwise. 2.2 Exercise. Payment may be made either (i) in cash or by certified or official bank check payable to the order of the Company equal to the applicable aggregate Exercise Price, (ii) by delivery of the Warrant, or shares of Common Stock and/or Common Stock receivable upon exercise of the Warrant in accordance with Section (b) below, or (iii) by a combination of any of the foregoing methods, for the number of Common Shares specified in such Exercise Notice (as such exercise number shall be adjusted to reflect any adjustment in the total number of shares of Common Stock issuable to the Holder per the terms of this Warrant) and the Holder shall thereupon be entitled to receive the number of duly authorized, validly issued, fully-paid and non-assessable shares of Common Stock (or Other Securities) determined as provided herein. Notwithstanding any provisions herein to the contrary, if the Fair Market Value of one share of Common Stock is greater than the Exercise Price (at the date of calculation as set forth below), in lieu of exercising this Warrant for cash, the Holder may elect to receive shares equal to the value (as determined below) of this Warrant (or the portion thereof being exercised) by surrender of this Warrant at the principal office of the Company together with the properly endorsed Exercise Notice in which event the Company shall issue to the Holder a number of shares of Common Stock computed using the following formula: X=Y (A-B) --------- A 3 Where X = the number of shares of Common Stock to be issued to the Holder Y = the number of shares of Common Stock purchasable under the Warrant or, if only a portion of the Warrant is being exercised, the portion of the Warrant being exercised (at the date of such calculation) A = the Fair Market Value of one share of the Company's Common Stock (at the date of such calculation) B = Exercise Price (as adjusted to the date of such calculation) 3. Effect of Reorganization, Etc.; Adjustment of Exercise Price. 3.1 Reorganization, Consolidation, Merger, Etc. In case at any time or from time to time, the Company shall (a) effect a reorganization, (b) consolidate with or merge into any other person, or (c) transfer all or substantially all of its properties or assets to any other person under any plan or arrangement contemplating the dissolution of the Company, then, in each such case, as a condition to the consummation of such a transaction, proper and adequate provision shall be made by the Company whereby the Holder of this Warrant, on the exercise hereof as provided in Section 1 at any time after the consummation of such reorganization, consolidation or merger or the effective date of such dissolution, as the case may be, shall receive, in lieu of the Common Stock (or Other Securities) issuable on such exercise prior to such consummation or such effective date, the stock and other securities and property (including cash) to which such Holder would have been entitled upon such consummation or in connection with such dissolution, as the case may be, if such Holder had so exercised this Warrant, immediately prior thereto, all subject to further adjustment thereafter as provided in Section 4. 3.2 Dissolution. In the event of any dissolution of the Company following the transfer of all or substantially all of its properties or assets, the Company, concurrently with any distributions made to holders of its Common Stock, shall at its expense deliver or cause to be delivered to the Holder the stock and other securities and property (including cash, where applicable) receivable by the Holder of the Warrant pursuant to Section 3.1, or, if the Holder shall so instruct the Company, to a bank or trust company specified by the Holder and having its principal office in New York, NY as trustee for the Holder of the Warrant (the "Trustee"). 3.3 Continuation of Terms. Upon any reorganization, consolidation, merger or transfer (and any dissolution following any transfer) referred to in this Section 3, this Warrant shall continue in full force and effect and the terms hereof shall be applicable to the shares of stock and other securities and property receivable on the exercise of this Warrant after the consummation of such reorganization, consolidation or merger or the effective date of dissolution following any such transfer, as the case may be, and shall be binding upon the issuer of any such stock or other securities, including, in the case of any such transfer, the person acquiring all or substantially all of the properties or assets of the Company, whether or not such person shall have expressly assumed the terms of this Warrant as provided in Section 4. In the event this Warrant does not continue in full force and effect after the consummation of the transactions described in this Section 3, then the Company's securities and property (including cash, where applicable) receivable by the Holders of the Warrant will be delivered to Holder or the Trustee as contemplated by Section 3.2. 4 4. Extraordinary Events Regarding Common Stock. In the event that the Company shall (a) issue additional shares of the Common Stock as a dividend or other distribution on outstanding Common Stock, (b) subdivide its outstanding shares of Common Stock, or (c) combine its outstanding shares of the Common Stock into a smaller number of shares of the Common Stock, then, in each such event, the Exercise Price shall, simultaneously with the happening of such event, be adjusted by multiplying the then Exercise Price by a fraction, the numerator of which shall be the number of shares of Common Stock outstanding immediately prior to such event and the denominator of which shall be the number of shares of Common Stock outstanding immediately after such event, and the product so obtained shall thereafter be the Exercise Price then in effect. The Exercise Price, as so adjusted, shall be readjusted in the same manner upon the happening of any successive event or events described herein in this Section 4. The number of shares of Common Stock that the holder of this Warrant shall thereafter, on the exercise hereof as provided in Section 1, be entitled to receive shall be increased to a number determined by multiplying the number of shares of Common Stock that would otherwise (but for the provisions of this Section 4) be issuable on such exercise by a fraction of which (a) the numerator is the Exercise Price that would otherwise (but for the provisions of this Section 4) be in effect, and (b) the denominator is the Exercise Price in effect on the date of such exercise. 5. Certificate as to Adjustments. In each case of any adjustment or readjustment in the shares of Common Stock (or Other Securities) issuable on the exercise of the Warrant, the Company at its expense will promptly cause its Chief Financial Officer or other appropriate designee to compute such adjustment or readjustment in accordance with the terms of the Warrant and prepare a certificate setting forth such adjustment or readjustment and showing in detail the facts upon which such adjustment or readjustment is based, including a statement of (a) the consideration received or receivable by the Company for any additional shares of Common Stock (or Other Securities) issued or sold or deemed to have been issued or sold, (b) the number of shares of Common Stock (or Other Securities) outstanding or deemed to be outstanding, and (c) the Exercise Price and the number of shares of Common Stock to be received upon exercise of this Warrant, in effect immediately prior to such adjustment or readjustment and as adjusted or readjusted as provided in this Warrant. The Company will forthwith mail a copy of each such certificate to the holder of the Warrant and any Warrant agent of the Company (appointed pursuant to Section 11 hereof). 6. Reservation of Stock, Etc., Issuable on Exercise of Warrant. The Company will at all times reserve and keep available, solely for issuance and delivery on the exercise of the Warrant, shares of Common Stock (or Other Securities) from time to time issuable on the exercise of the Warrant. 7. Assignment; Exchange of Warrant. Subject to compliance with applicable securities laws, this Warrant, and the rights evidenced hereby, may be transferred by any registered holder hereof (a "Transferor") in whole or in part. On the surrender for exchange of this Warrant, with the Transferor's endorsement in the form of Exhibit B attached hereto (the "Transferor Endorsement Form") and together with evidence reasonably satisfactory to the Company demonstrating compliance with applicable securities laws, which shall include, without limitation, the provision of a legal opinion from the Transferor's counsel (at the Company's expense) that such transfer is exempt from the registration requirements of applicable securities laws, and with payment by the Transferor of any applicable transfer taxes) will issue and deliver to or on the order of the Transferor thereof a new Warrant of like tenor, in the name of the Transferor and/or the transferee(s) specified in such Transferor Endorsement Form (each a "Transferee"), calling in the aggregate on the face or faces thereof for the number of shares of Common Stock called for on the face or faces of the Warrant so surrendered by the Transferor. 5 8. Replacement of Warrant. On receipt of evidence reasonably satisfactory to the Company of the loss, theft, destruction or mutilation of this Warrant and, in the case of any such loss, theft or destruction of this Warrant, on delivery of an indemnity agreement or security reasonably satisfactory in form and amount to the Company or, in the case of any such mutilation, on surrender and cancellation of this Warrant, the Company at its expense will execute and deliver, in lieu thereof, a new Warrant of like tenor. 9. Registration Rights. The Holder of this Warrant has been granted certain registration rights by the Company. These registration rights are set forth in a Registration Rights Agreement entered into by the Company and Purchaser dated as of even date of this Warrant. 10. Maximum Exercise. The Holder shall not be entitled to exercise this Warrant on an exercise date, in connection with that number of shares of Common Stock which would be in excess of the sum of (i) the number of shares of Common Stock beneficially owned by the Holder and its affiliates on an exercise date, and (ii) the number of shares of Common Stock issuable upon the exercise of this Warrant with respect to which the determination of this proviso is being made on an exercise date, which would result in beneficial ownership by the Holder and its affiliates of more than 4.99% of the outstanding shares of Common Stock of the Company on such date. For the purposes of the proviso to the immediately preceding sentence, beneficial ownership shall be determined in accordance with Section 13(d) of the Securities Exchange Act of 1934, as amended, and Regulation 13d-3 thereunder. Notwithstanding the foregoing, the restriction described in this paragraph may be revoked upon 75 days prior notice from the Holder to the Company and is automatically null and void upon an Event of Default under the Note. 11. Warrant Agent. The Company may, by written notice to the each Holder of the Warrant, appoint an agent for the purpose of issuing Common Stock (or Other Securities) on the exercise of this Warrant pursuant to Section 1, exchanging this Warrant pursuant to Section 7, and replacing this Warrant pursuant to Section 8, or any of the foregoing, and thereafter any such issuance, exchange or replacement, as the case may be, shall be made at such office by such agent. 12. Transfer on the Company's Books. Until this Warrant is transferred on the books of the Company, the Company may treat the registered holder hereof as the absolute owner hereof for all purposes, notwithstanding any notice to the contrary. 6 13. Notices, Etc. All notices and other communications from the Company to the Holder of this Warrant shall be mailed by first class registered or certified mail, postage prepaid, at such address as may have been furnished to the Company in writing by such Holder or, until any such Holder furnishes to the Company an address, then to, and at the address of, the last Holder of this Warrant who has so furnished an address to the Company. 14. Voluntary Adjustment by the Company. The Company may at any time during the term of this Warrant reduce the then current Exercise Price to any amount and for any period of time deemed appropriate by the Board of Directors of the Company. 15. Miscellaneous. This Warrant and any term hereof may be changed, waived, discharged or terminated only by an instrument in writing signed by the party against which enforcement of such change, waiver, discharge or termination is sought. This Warrant shall be governed by and construed in accordance with the laws of State of New York without regard to principles of conflicts of laws. Except as set forth below in this Section 15, any and all disputes, controversies and claims that the Company may assert against the any Holder arising out of or relating to this Warrant shall be determined exclusively by arbitration (each such arbitration, an "Arbitration") in New York City before a panel of three neutral arbitrators agreed to by the Purchaser and the Company (collectively, the "Arbitrators") in accordance with and pursuant to the then existing commercial arbitration rules of the American Arbitration Association. The Company hereby irrevocably waives any right to assert such claims in any other forum. The Arbitrators shall have the power in their discretion to award specific performance or injunctive relief (but shall not have the power to render any incidental, special or punitive damages) and reasonable attorneys' fees and expenses to any party in any arbitration. The Arbitrators may not change, modify or alter any express condition, term or provision of this Warrant nor shall they have the power to render any award against any Holder that would have such effect. Each Arbitration award shall be final and binding upon the parties subject thereto and judgment may be entered thereon in any court of competent jurisdiction. The service of any notice, process, motion or other document in connection with an Arbitration or for the enforcement of any Arbitration award may be made in the same manner as communications may be given under Section 13 hereof. Notwithstanding the foregoing, the provisions of this Section 15 nor any other provision contained in this Warrant shall limit in any manner whatsoever any Holder's right to commence an action against or in connection with the Company or its properties in any court of competent jurisdiction or otherwise utilize judicial process in connection with or arising out of any Holder's rights and remedies under this Warrant or otherwise (any such action, a "Court Action"). Court Actions may be brought by any Holder in any state or federal court of competent jurisdiction and the Company irrevocably submits to the jurisdiction of such state and federal courts and irrevocably waives any claim or defense of inconvenient forum or lack of personal jurisdiction in such forum or right of removal or right to jury trial under any applicable law or decision or otherwise. Service of any notice, process, motion or other document in connection with a Court Action may be made in the same manner as communications may be given under Section 13. In addition, any Holder may serve process in any other manner permitted under applicable law. The individuals executing this Warrant on behalf of the Company agree to waive trial by jury. The prevailing party shall be entitled to recover from the other party its reasonable attorney's fees and costs. In the event that any provision of this Warrant is invalid or unenforceable under any applicable statute or rule of law, then such provision shall be deemed inoperative to the extent that it may conflict therewith and shall be deemed modified to conform with such statute or rule of law. Any such provision which may prove invalid or unenforceable under any law shall not affect the validity or enforceability of any other provision of this Warrant. The headings in this Warrant are for purposes of reference only, and shall not limit or otherwise affect any of the terms hereof. The invalidity or unenforceability of any provision hereof shall in no way affect the validity or enforceability of any other provision hereof. The Company acknowledges that legal counsel participated in the preparation of this Warrant and, therefore, stipulates that the rule of construction that ambiguities are to be resolved against the drafting party shall not be applied in the interpretation of this Warrant to favor any party against the other party. [BALANCE OF PAGE INTENTIONALLY LEFT BLANK; SIGNATURE PAGE FOLLOWS.] 7 IN WITNESS WHEREOF, the Company has executed this Warrant as of the date first written above. EPIXTAR CORP. By: -------------------------------- Name: -------------------------------- Title: - ---------------------------------- -------------------------------- 8 EXHIBIT A FORM OF SUBSCRIPTION (To Be Signed Only On Exercise Of Warrant) TO: Epixtar Corp. Attention: Chief Financial Officer The undersigned, pursuant to the provisions set forth in the attached Warrant (No.____), hereby irrevocably elects to purchase (check applicable box): - ------------ ________ shares of the Common Stock covered by such Warrant; or the maximum number of shares of Common Stock covered by such - ------------ Warrant pursuant to the cashless exercise procedure set forth in Section 2. The undersigned herewith makes payment of the full Exercise Price for such shares at the price per share provided for in such Warrant, which is $___________. Such payment takes the form of (check applicable box or boxes): - ------------ $__________ in lawful money of the United States; and/or - ------------ the cancellation of such portion of the attached Warrant as is exercisable for a total of _______ shares of Common Stock (using a Fair Market Value of $_______ per share for purposes of this calculation); and/or - ------------ the cancellation of such number of shares of Common Stock as is necessary, in accordance with the formula set forth in Section 2.2, to exercise this Warrant with respect to the maximum number of shares of Common Stock purchasable pursuant to the cashless exercise procedure set forth in Section 2. The undersigned requests that the certificates for such shares be issued in the name of, and delivered to ____________________________________ ______________________________________________ whose address is - ---------------------------------------------------------------------------. The undersigned represents and warrants that all offers and sales by the undersigned of the securities issuable upon exercise of the within Warrant shall be made pursuant to registration of the Common Stock under the Securities Act of 1933, as amended (the "Securities Act") or pursuant to an exemption from registration under the Securities Act. Dated: ------------------------------- ----------------------------------- (Signature must conform to name of holder as specified on the face of the Warrant) Address: ------------------------------ ------------------------------ A-1 EXHIBIT B FORM OF TRANSFEROR ENDORSEMENT (To Be Signed Only On Transfer Of Warrant) For value received, the undersigned hereby sells, assigns, and transfers unto the person(s) named below under the heading "Transferees" the right represented by the within Warrant to purchase the percentage and number of shares of Common Stock of Epixtar Corp. into which the within Warrant relates specified under the headings "Percentage Transferred" and "Number Transferred," respectively, opposite the name(s) of such person(s) and appoints each such person Attorney to transfer its respective right on the books of Epixtar Corp. with full power of substitution in the premises.
Percentage Number Transferees Address Transferred Transferred - ----------- ------- ----------- ----------- - -------------------------------------- ----------------------------------- ----------------- ---------------- - -------------------------------------- ----------------------------------- ----------------- ---------------- - -------------------------------------- ----------------------------------- ----------------- ---------------- - -------------------------------------- ----------------------------------- ----------------- ----------------
Dated: ------------------------------ -------------------------------------- (Signature must conform to name of holder as specified on the face of the Warrant) Address: ---------------------------- ---------------------------- SIGNED IN THE PRESENCE OF: -------------------------------------- (Name) ACCEPTED AND AGREED: [TRANSFEREE] - -------------------------------------- (Name) B-1 EX-4.11.4.1 7 b332632_ex4114-1.txt WARRANT II Exhibit 4.11.4.1 THIS WARRANT AND THE SHARES OF COMMON STOCK ISSUABLE UPON EXERCISE OF THIS WARRANT HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR ANY STATE SECURITIES LAWS. THIS WARRANT AND THE COMMON STOCK ISSUABLE UPON EXERCISE OF THIS WARRANT MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED OR HYPOTHECATED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT AS TO THIS WARRANT UNDER SAID ACT AND ANY APPLICABLE STATE SECURITIES LAWS OR AN OPINION OF COUNSEL REASONABLY SATISFACTORY TO EPIXTAR CORP. THAT SUCH REGISTRATION IS NOT REQUIRED. Right to Purchase up to 197,531 Shares of Common Stock of Epixtar Corp. -------------- (subject to adjustment as provided herein) COMMON STOCK PURCHASE WARRANT II No. _________________ Issue Date: May 14, 2004 EPIXTAR CORP., a corporation organized under the laws of the State of Florida ("Epixtar"), hereby certifies that, for value received, LAURUS MASTER FUND, LTD., or assigns (the "Holder"), is entitled, subject to the terms set forth below, to purchase from the Company (as defined herein) from and after the Effective Date and at any time or from time to time before 5:00 p.m., New York time, through the close of business May 14, 2011 (the "Expiration Date"), up to 197,531 fully paid and nonassessable shares of Common Stock (as hereinafter defined), $0.001 par value per share, at the applicable Exercise Price per share (as defined below). The number and character of such shares of Common Stock and the applicable Exercise Price per share are subject to adjustment as provided herein. As used herein the following terms, unless the context otherwise requires, have the following respective meanings: (a) The term "Company" shall include Epixtar and any corporation which shall succeed, or assume the obligations of, Epixtar hereunder. (b) The term "Common Stock" includes (i) the Company's Common Stock, par value $0.001 per share; and (ii) any other securities into which or for which any of the securities described in (a) may be converted or exchanged pursuant to a plan of recapitalization, reorganization, merger, sale of assets or otherwise. (c) The term "Other Securities" refers to any stock (other than Common Stock) and other securities of the Company or any other person (corporate or otherwise) which the holder of the Warrant at any time shall be entitled to receive, or shall have received, on the exercise of the Warrant, in lieu of or in addition to Common Stock, or which at any time shall be issuable or shall have been issued in exchange for or in replacement of Common Stock or Other Securities pursuant to Section 4 or otherwise. (d) The "Exercise Price" applicable under this Warrant shall be as follows: (i) a price of $4.46 for the first 32,922 shares acquired hereunder; and (ii) a price of $4.66 for any additional shares acquired hereunder. (e) The "Effective Date" shall mean the date upon which (x) the Registration Statement referred to, and defined, in that certain Registration Rights Agreement (as defined in the Securities Purchase Agreement, dated as of the date hereof, by and between the Holder and the Company (as amended, modified or supplemented from time to time, the "Purchase Agreement") has become effective, (y) the entire amount outstanding (including, without limitation, principal, interest and fees) under the Bridge Loan Documents (as defined in the Purchase Agreement) has either been fully converted into Common Stock and/or been repaid in full in cash and (z) the Holder shall have received written notification satisfactory to it from the Lustigman Firm, P.C., special Federal Trade Commission ("FTC") counsel to the Company, that the Stipulated Order for Permanent Injunction and Final Judgment with respect to that certain action instituted against the Company and certain of its Subsidiaries by the FTC on October 30, 2003 (the "Stipulated Order") has been executed by the Company and by FTC Staff Counsel, and the Stipulated Order has been forwarded to FTC headquarters in Washington D.C. for review and final approval by the FTC; provided that, the Effective Date shall be deemed not occur in the event that an Event of Default (as defined in the Note (as defined in the Purchase Agreement)) has occurred and is continuing beyond any applicable grace period (until such time as such Event of Default has been waived by the Holder) . 1. Exercise of Warrant. 1.1 Number of Shares Issuable upon Exercise. From and after the date hereof through and including the Expiration Date, the Holder shall be entitled to receive, upon exercise of this Warrant in whole or in part, by delivery of an original or fax copy of an exercise notice in the form attached hereto as Exhibit A (the "Exercise Notice"), shares of Common Stock of the Company, subject to adjustment pursuant to Section 4. 1.2 Fair Market Value. For purposes hereof, the "Fair Market Value" of a share of Common Stock as of a particular date (the "Determination Date") shall mean: (a) If the Company's Common Stock is traded on the American Stock Exchange or another national exchange or is quoted on the National or SmallCap Market of The Nasdaq Stock Market, Inc.("Nasdaq"), then the closing or last sale price, respectively, reported for the last business day immediately preceding the Determination Date. (b) If the Company's Common Stock is not traded on the American Stock Exchange or another national exchange or on the Nasdaq but is traded on the NASD OTC Bulletin Board, then the mean of the average of the closing bid and asked prices reported for the last business day immediately preceding the Determination Date. 2 (c) Except as provided in clause (d) below, if the Company's Common Stock is not publicly traded, then as the Holder and the Company agree or in the absence of agreement by arbitration in accordance with the rules then in effect of the American Arbitration Association, before a single arbitrator to be chosen from a panel of persons qualified by education and training to pass on the matter to be decided. (d) If the Determination Date is the date of a liquidation, dissolution or winding up, or any event deemed to be a liquidation, dissolution or winding up pursuant to the Company's charter, then all amounts to be payable per share to holders of the Common Stock pursuant to the charter in the event of such liquidation, dissolution or winding up, plus all other amounts to be payable per share in respect of the Common Stock in liquidation under the charter, assuming for the purposes of this clause (d) that all of the shares of Common Stock then issuable upon exercise of the Warrant are outstanding at the Determination Date. 1.3 Company Acknowledgment. The Company will, at the time of the exercise of the Warrant, upon the request of the holder hereof acknowledge in writing its continuing obligation to afford to such holder any rights to which such holder shall continue to be entitled after such exercise in accordance with the provisions of this Warrant. If the holder shall fail to make any such request, such failure shall not affect the continuing obligation of the Company to afford to such holder any such rights. 1.4 Trustee for Warrant Holders. In the event that a bank or trust company shall have been appointed as trustee for the holders of the Warrant pursuant to Subsection 3.2, such bank or trust company shall have all the powers and duties of a warrant agent (as hereinafter described) and shall accept, in its own name for the account of the Company or such successor person as may be entitled thereto, all amounts otherwise payable to the Company or such successor, as the case may be, on exercise of this Warrant pursuant to this Section 1. 2. Procedure for Exercise. 2.1 Delivery of Stock Certificates, Etc., on Exercise. The Company agrees that the shares of Common Stock purchased upon exercise of this Warrant shall be deemed to be issued to the Holder as the record owner of such shares as of the close of business on the date on which this Warrant shall have been surrendered and payment made for such shares in accordance herewith. As soon as practicable after the exercise of this Warrant in full or in part, and in any event within three (3) business days thereafter, the Company at its expense (including the payment by it of any applicable issue taxes) will cause to be issued in the name of and delivered to the Holder, or as such Holder (upon payment by such Holder of any applicable transfer taxes) may direct in compliance with applicable securities laws, a certificate or certificates for the number of duly and validly issued, fully paid and nonassessable shares of Common Stock (or Other Securities) to which such Holder shall be entitled on such exercise, plus, in lieu of any fractional share to which such holder would otherwise be entitled, cash equal to such fraction multiplied by the then Fair Market Value of one full share, together with any other stock or other securities and property (including cash, where applicable) to which such Holder is entitled upon such exercise pursuant to Section 1 or otherwise. 3 2.2 Exercise. Payment may be made either (i) in cash or by certified or official bank check payable to the order of the Company equal to the applicable aggregate Exercise Price, (ii) by delivery of the Warrant, or shares of Common Stock and/or Common Stock receivable upon exercise of the Warrant in accordance with Section (b) below, or (iii) by a combination of any of the foregoing methods, for the number of Common Shares specified in such Exercise Notice (as such exercise number shall be adjusted to reflect any adjustment in the total number of shares of Common Stock issuable to the Holder per the terms of this Warrant) and the Holder shall thereupon be entitled to receive the number of duly authorized, validly issued, fully-paid and non-assessable shares of Common Stock (or Other Securities) determined as provided herein. Notwithstanding any provisions herein to the contrary, if the Fair Market Value of one share of Common Stock is greater than the Exercise Price (at the date of calculation as set forth below), in lieu of exercising this Warrant for cash, the Holder may elect to receive shares equal to the value (as determined below) of this Warrant (or the portion thereof being exercised) by surrender of this Warrant at the principal office of the Company together with the properly endorsed Exercise Notice in which event the Company shall issue to the Holder a number of shares of Common Stock computed using the following formula: X=Y (A-B) --------- A Where X = the number of shares of Common Stock to be issued to the Holder Y = the number of shares of Common Stock purchasable under the Warrant or, if only a portion of the Warrant is being exercised, the portion of the Warrant being exercised (at the date of such calculation) A = the Fair Market Value of one share of the Company's Common Stock (at the date of such calculation) B = Exercise Price (as adjusted to the date of such calculation) 3. Effect of Reorganization, Etc.; Adjustment of Exercise Price. 3.1 Reorganization, Consolidation, Merger, Etc. In case at any time or from time to time, the Company shall (a) effect a reorganization, (b) consolidate with or merge into any other person, or (c) transfer all or substantially all of its properties or assets to any other person under any plan or arrangement contemplating the dissolution of the Company, then, in each such case, as a condition to the consummation of such a transaction, proper and adequate provision shall be made by the Company whereby the Holder of this Warrant, on the exercise hereof as provided in Section 1 at any time after the consummation of such reorganization, consolidation or merger or the effective date of such dissolution, as the case may be, shall receive, in lieu of the Common Stock (or Other Securities) issuable on such exercise prior to such consummation or such effective date, the stock and other securities and property (including cash) to which such Holder would have been entitled upon such consummation or in connection with such dissolution, as the case may be, if such Holder had so exercised this Warrant, immediately prior thereto, all subject to further adjustment thereafter as provided in Section 4. 4 3.2 Dissolution. In the event of any dissolution of the Company following the transfer of all or substantially all of its properties or assets, the Company, concurrently with any distributions made to holders of its Common Stock, shall at its expense deliver or cause to be delivered to the Holder the stock and other securities and property (including cash, where applicable) receivable by the Holder of the Warrant pursuant to Section 3.1, or, if the Holder shall so instruct the Company, to a bank or trust company specified by the Holder and having its principal office in New York, NY as trustee for the Holder of the Warrant (the "Trustee"). 3.3 Continuation of Terms. Upon any reorganization, consolidation, merger or transfer (and any dissolution following any transfer) referred to in this Section 3, this Warrant shall continue in full force and effect and the terms hereof shall be applicable to the shares of stock and other securities and property receivable on the exercise of this Warrant after the consummation of such reorganization, consolidation or merger or the effective date of dissolution following any such transfer, as the case may be, and shall be binding upon the issuer of any such stock or other securities, including, in the case of any such transfer, the person acquiring all or substantially all of the properties or assets of the Company, whether or not such person shall have expressly assumed the terms of this Warrant as provided in Section 4. In the event this Warrant does not continue in full force and effect after the consummation of the transactions described in this Section 3, then the Company's securities and property (including cash, where applicable) receivable by the Holders of the Warrant will be delivered to Holder or the Trustee as contemplated by Section 3.2. 4. Extraordinary Events Regarding Common Stock. In the event that the Company shall (a) issue additional shares of the Common Stock as a dividend or other distribution on outstanding Common Stock, (b) subdivide its outstanding shares of Common Stock, or (c) combine its outstanding shares of the Common Stock into a smaller number of shares of the Common Stock, then, in each such event, the Exercise Price shall, simultaneously with the happening of such event, be adjusted by multiplying the then Exercise Price by a fraction, the numerator of which shall be the number of shares of Common Stock outstanding immediately prior to such event and the denominator of which shall be the number of shares of Common Stock outstanding immediately after such event, and the product so obtained shall thereafter be the Exercise Price then in effect. The Exercise Price, as so adjusted, shall be readjusted in the same manner upon the happening of any successive event or events described herein in this Section 4. The number of shares of Common Stock that the holder of this Warrant shall thereafter, on the exercise hereof as provided in Section 1, be entitled to receive shall be increased to a number determined by multiplying the number of shares of Common Stock that would otherwise (but for the provisions of this Section 4) be issuable on such exercise by a fraction of which (a) the numerator is the Exercise Price that would otherwise (but for the provisions of this Section 4) be in effect, and (b) the denominator is the Exercise Price in effect on the date of such exercise. 5. Certificate as to Adjustments. In each case of any adjustment or readjustment in the shares of Common Stock (or Other Securities) issuable on the exercise of the Warrant, the Company at its expense will promptly cause its Chief Financial Officer or other appropriate designee to compute such adjustment or readjustment in accordance with the terms of the Warrant and prepare a certificate setting forth such adjustment or readjustment and showing in detail the facts upon which such adjustment or readjustment is based, including a statement of (a) the consideration received or receivable by the Company for any additional shares of Common Stock (or Other Securities) issued or sold or deemed to have been issued or sold, (b) the number of shares of Common Stock (or Other Securities) outstanding or deemed to be outstanding, and (c) the Exercise Price and the number of shares of Common Stock to be received upon exercise of this Warrant, in effect immediately prior to such adjustment or readjustment and as adjusted or readjusted as provided in this Warrant. The Company will forthwith mail a copy of each such certificate to the holder of the Warrant and any Warrant agent of the Company (appointed pursuant to Section 11 hereof). 5 6. Reservation of Stock, Etc., Issuable on Exercise of Warrant. The Company will at all times reserve and keep available, solely for issuance and delivery on the exercise of the Warrant, shares of Common Stock (or Other Securities) from time to time issuable on the exercise of the Warrant. 7. Assignment; Exchange of Warrant. Subject to compliance with applicable securities laws, this Warrant, and the rights evidenced hereby, may be transferred by any registered holder hereof (a "Transferor") in whole or in part. On the surrender for exchange of this Warrant, with the Transferor's endorsement in the form of Exhibit B attached hereto (the "Transferor Endorsement Form") and together with evidence reasonably satisfactory to the Company demonstrating compliance with applicable securities laws, which shall include, without limitation, the provision of a legal opinion from the Transferor's counsel (at the Company's expense) that such transfer is exempt from the registration requirements of applicable securities laws, and with payment by the Transferor of any applicable transfer taxes) will issue and deliver to or on the order of the Transferor thereof a new Warrant of like tenor, in the name of the Transferor and/or the transferee(s) specified in such Transferor Endorsement Form (each a "Transferee"), calling in the aggregate on the face or faces thereof for the number of shares of Common Stock called for on the face or faces of the Warrant so surrendered by the Transferor. 8. Replacement of Warrant. On receipt of evidence reasonably satisfactory to the Company of the loss, theft, destruction or mutilation of this Warrant and, in the case of any such loss, theft or destruction of this Warrant, on delivery of an indemnity agreement or security reasonably satisfactory in form and amount to the Company or, in the case of any such mutilation, on surrender and cancellation of this Warrant, the Company at its expense will execute and deliver, in lieu thereof, a new Warrant of like tenor. 9. Registration Rights. The Holder of this Warrant has been granted certain registration rights by the Company. These registration rights are set forth in a Registration Rights Agreement entered into by the Company and Purchaser dated as of even date of this Warrant. 10. Maximum Exercise. The Holder shall not be entitled to exercise this Warrant on an exercise date, in connection with that number of shares of Common Stock which would be in excess of the sum of (i) the number of shares of Common Stock beneficially owned by the Holder and its affiliates on an exercise date, and (ii) the number of shares of Common Stock issuable upon the exercise of this Warrant with respect to which the determination of this proviso is being made on an exercise date, which would result in beneficial ownership by the Holder and its affiliates of more than 4.99% of the outstanding shares of Common Stock of the Company on such date. For the purposes of the proviso to the immediately preceding sentence, beneficial ownership shall be determined in accordance with Section 13(d) of the Securities Exchange Act of 1934, as amended, and Regulation 13d-3 thereunder. Notwithstanding the foregoing, the restriction described in this paragraph may be revoked upon 75 days prior notice from the Holder to the Company and is automatically null and void upon an Event of Default under the Note. 6 11. Warrant Agent. The Company may, by written notice to the each Holder of the Warrant, appoint an agent for the purpose of issuing Common Stock (or Other Securities) on the exercise of this Warrant pursuant to Section 1, exchanging this Warrant pursuant to Section 7, and replacing this Warrant pursuant to Section 8, or any of the foregoing, and thereafter any such issuance, exchange or replacement, as the case may be, shall be made at such office by such agent. 12. Transfer on the Company's Books. Until this Warrant is transferred on the books of the Company, the Company may treat the registered holder hereof as the absolute owner hereof for all purposes, notwithstanding any notice to the contrary. 13. Notices, Etc. All notices and other communications from the Company to the Holder of this Warrant shall be mailed by first class registered or certified mail, postage prepaid, at such address as may have been furnished to the Company in writing by such Holder or, until any such Holder furnishes to the Company an address, then to, and at the address of, the last Holder of this Warrant who has so furnished an address to the Company. 14. Voluntary Adjustment by the Company. The Company may at any time during the term of this Warrant reduce the then current Exercise Price to any amount and for any period of time deemed appropriate by the Board of Directors of the Company. 15. Miscellaneous. This Warrant and any term hereof may be changed, waived, discharged or terminated only by an instrument in writing signed by the party against which enforcement of such change, waiver, discharge or termination is sought. This Warrant shall be governed by and construed in accordance with the laws of State of New York without regard to principles of conflicts of laws. Except as set forth below in this Section 15, any and all disputes, controversies and claims that the Company may assert against the any Holder arising out of or relating to this Warrant shall be determined exclusively by arbitration (each such arbitration, an "Arbitration") in New York City before a panel of three neutral arbitrators agreed to by the Purchaser and the Company (collectively, the "Arbitrators") in accordance with and pursuant to the then existing commercial arbitration rules of the American Arbitration Association. The Company hereby irrevocably waives any right to assert such claims in any other forum. The Arbitrators shall have the power in their discretion to award specific performance or injunctive relief (but shall not have the power to render any incidental, special or punitive damages) and reasonable attorneys' fees and expenses to any party in any arbitration. The Arbitrators may not 7 change, modify or alter any express condition, term or provision of this Warrant nor shall they have the power to render any award against any Holder that would have such effect. Each Arbitration award shall be final and binding upon the parties subject thereto and judgment may be entered thereon in any court of competent jurisdiction. The service of any notice, process, motion or other document in connection with an Arbitration or for the enforcement of any Arbitration award may be made in the same manner as communications may be given under Section 13 hereof. Notwithstanding the foregoing, the provisions of this Section 15 nor any other provision contained in this Warrant shall limit in any manner whatsoever any Holder's right to commence an action against or in connection with the Company or its properties in any court of competent jurisdiction or otherwise utilize judicial process in connection with or arising out of any Holder's rights and remedies under this Warrant or otherwise (any such action, a "Court Action"). Court Actions may be brought by any Holder in any state or federal court of competent jurisdiction and the Company irrevocably submits to the jurisdiction of such state and federal courts and irrevocably waives any claim or defense of inconvenient forum or lack of personal jurisdiction in such forum or right of removal or right to jury trial under any applicable law or decision or otherwise. Service of any notice, process, motion or other document in connection with a Court Action may be made in the same manner as communications may be given under Section 13. In addition, any Holder may serve process in any other manner permitted under applicable law. The individuals executing this Warrant on behalf of the Company agree to waive trial by jury. The prevailing party shall be entitled to recover from the other party its reasonable attorney's fees and costs. In the event that any provision of this Warrant is invalid or unenforceable under any applicable statute or rule of law, then such provision shall be deemed inoperative to the extent that it may conflict therewith and shall be deemed modified to conform with such statute or rule of law. Any such provision which may prove invalid or unenforceable under any law shall not affect the validity or enforceability of any other provision of this Warrant. The headings in this Warrant are for purposes of reference only, and shall not limit or otherwise affect any of the terms hereof. The invalidity or unenforceability of any provision hereof shall in no way affect the validity or enforceability of any other provision hereof. The Company acknowledges that legal counsel participated in the preparation of this Warrant and, therefore, stipulates that the rule of construction that ambiguities are to be resolved against the drafting party shall not be applied in the interpretation of this Warrant to favor any party against the other party. [BALANCE OF PAGE INTENTIONALLY LEFT BLANK; SIGNATURE PAGE FOLLOWS.] 8 IN WITNESS WHEREOF, the Company has executed this Warrant as of the date first written above. EPIXTAR CORP. By: -------------------------------- Name: -------------------------------- Title: - --------------------------------------- -------------------------------- 9 EXHIBIT A FORM OF SUBSCRIPTION (To Be Signed Only On Exercise Of Warrant) TO: Epixtar Corp. Attention: Chief Financial Officer The undersigned, pursuant to the provisions set forth in the attached Warrant (No.____), hereby irrevocably elects to purchase (check applicable box): - ------------ --------- shares of the Common Stock covered by such Warrant; or the maximum number of shares of Common Stock covered by such Warrant pursuant to the cashless exercise procedure set forth - ------------ in Section 2. The undersigned herewith makes payment of the full Exercise Price for such shares at the price per share provided for in such Warrant, which is $___________. Such payment takes the form of (check applicable box or boxes): - ------------ $__________ in lawful money of the United States; and/or the cancellation of such portion of the attached Warrant as is - ------------ exercisable for a total of _______ shares of Common Stock (using a Fair Market Value of $_______ per share for purposes of this calculation); and/or the cancellation of such number of shares of Common Stock as - ------------ is necessary, in accordance with the formula set forth in Section 2.2, to exercise this Warrant with respect to the maximum number of shares of Common Stock purchasable pursuant to the cashless exercise procedure set forth in Section 2. The undersigned requests that the certificates for such shares be issued in the name of, and delivered to ________________________________________ whose address is _______________________________________________________________________________. The undersigned represents and warrants that all offers and sales by the undersigned of the securities issuable upon exercise of the within Warrant shall be made pursuant to registration of the Common Stock under the Securities Act of 1933, as amended (the "Securities Act") or pursuant to an exemption from registration under the Securities Act. Dated: ----------------------------------- ----------------------------------- (Signature must conform to name of holder as specified on the face of the Warrant) Address: ------------------------- ------------------------- A-1 EXHIBIT B FORM OF TRANSFEROR ENDORSEMENT (To Be Signed Only On Transfer Of Warrant) For value received, the undersigned hereby sells, assigns, and transfers unto the person(s) named below under the heading "Transferees" the right represented by the within Warrant to purchase the percentage and number of shares of Common Stock of Epixtar Corp. into which the within Warrant relates specified under the headings "Percentage Transferred" and "Number Transferred," respectively, opposite the name(s) of such person(s) and appoints each such person Attorney to transfer its respective right on the books of Epixtar Corp. with full power of substitution in the premises.
Percentage Number Transferees Address Transferred Transferred - ----------- ------- ----------- ----------- - -------------------------------------- ----------------------------------- ----------------- ---------------- - -------------------------------------- ----------------------------------- ----------------- ---------------- - -------------------------------------- ----------------------------------- ----------------- ---------------- - -------------------------------------- ----------------------------------- ----------------- ----------------
Dated: ------------------------------ -------------------------------------- (Signature must conform to name of holder as specified on the face of the Warrant) Address: ---------------------------- ---------------------------- SIGNED IN THE PRESENCE OF: -------------------------------------- (Name) ACCEPTED AND AGREED: [TRANSFEREE] - -------------------------------------- (Name) B-1 EX-4.11.5 8 b332632_ex411-5.txt RESTRICTIVE ACCOUNT AGREEMENT Exhibit 4.11.5 LAURUS RESTRICTED ACCOUNT AGREEMENT This Laurus Restricted Account Agreement (this "Agreement") is entered into this 14th day of May 2004, by and among NORTH FORK BANK, a New York banking corporation with offices at 275 Broadhollow Road, Melville, New York 11747 (together with its successors and assigns, the "Bank"), Epixtar Corp., a Florida corporation with offices at 11900 Biscayne Boulevard, Suite 262, Miami, Florida 33181 (together with its successors and assigns, the "Company"), and LAURUS MASTER FUND, LTD., a Cayman Islands corporation with offices at 825 Third Avenue, 14th Floor, New York, New York 10022 (together with its successors and assigns, "Laurus"). Unless otherwise defined herein, capitalized terms used herein shall have the meaning provided such terms in the Purchase Agreement referred to below. WHEREAS, Laurus has provided financing to the Company, which financing is evidenced by a Securities Purchase Agreement (as amended, modified or supplemented from time to time, the "Purchase Agreement") and the Related Agreements referred to therein; WHEREAS, the Company and Laurus have retained the Bank to provide certain services with respect to the Laurus Restricted Account (as defined below); and WHERERAS, the Company and Laurus have agreed that an amount of cash equal to $1,930,000 shall be deposited by Laurus on behalf of the Company by wire transfer of immediately available funds into the Laurus Restricted Account, which cash shall be held by the Bank for the benefit of Laurus, as security for the Company's and its Subsidiaries' obligations under the Purchase Agreement and the Related Agreements. For the purposes of this Agreement, the "Laurus Restricted Account" shall mean that certain deposit account (as defined in Section 9-102 of the Uniform Commercial Code as in effect in the State of New York on the date hereof) described on Exhibit B hereto, which Laurus Restricted Account shall be maintained at the Bank and shall be in the sole dominion and control of Laurus; NOW THEREFORE, in consideration of the mutual promises contained herein and for other good and valuable consideration the sufficiency of which is hereby acknowledged, the parties hereto agree as follows: 1. The Bank is hereby authorized to accept for deposit into the Laurus Restricted Account the sum of $1,930,000. The Bank hereby agrees to hold any and all monies, and other amounts from time to time on deposit and/or held in the Laurus Restricted Account for the benefit of the Laurus and shall not release any monies held in the Laurus Restricted Account until such time as the Bank shall have received a notice from Laurus substantially in the form attached hereto as Exhibit A (a "Release Notice"). Following the receipt of a Release Notice from Laurus, the Bank agrees to promptly disburse the amount of cash referred to in such Release Notice to such account as Laurus shall determine in its sole discretion. The Bank hereby agrees that it will only comply with written instructions originated by Laurus directing disposition of funds in the Laurus Restricted Account. The Company hereby irrevocably authorizes the Bank to comply with any and all instructions given to the Bank by Laurus with respect to the Laurus Restricted Account without further consent by the Company. The Bank, the Company and Laurus agree that the Laurus Restricted Account is in Laurus' sole dominion and control. 2. Each of the Company, Laurus and the Bank hereby agrees that the Laurus Restricted Account shall not be closed, and the account name and account number in respect thereof shall not be changed, in any case, without the consent of the Laurus, except as specifically provided for in Section 9 below. 3. The Bank hereby subordinates any claims and security interests it may have against, or with respect to, the Laurus Restricted Account (including any amounts from time to time on deposit therein) to the security interests of Laurus therein, and agrees that no amounts shall be charged by it to, or withheld or set-off or otherwise recouped by it from, the Laurus Restricted Account or any amounts from time to time on deposit therein; provided that, in connection with all service charges and any other charges which the Bank is entitled to receive in connection with the servicing and maintaining of the Laurus Restricted Account (such charges, collectively, the "Charges"), each of the Company, Laurus and the Bank hereby agrees that the Bank will collect such Charges in the following manner: (i) first, the Bank will charge other deposit accounts maintained by the Company with the Bank, (ii) second, in the event that there are insufficient collected funds in such other deposit accounts to pay such Charges, the Bank will promptly notify the Company and Laurus with respect to same and, within seven (7) business days of the Company's receipt of such notice, the Company shall pay to the Bank the full amount of such Charges then due, and (iii) third, if the Company fails to pay to the Bank such Charges then due within the time period set forth in the preceding clause (ii), the Bank will promptly provide a written notice to Laurus of such occurrence and, in such case, the Bank is hereby authorized, following a period of five (5) business days after the receipt of such written notice by Laurus, to deduct such Charges then due from the Laurus Restricted Account, unless, during such five (5) business day period, Laurus pays the amount of any such Charges then due to the Bank from its own account. Except for the payment of the Charges as set forth in the immediately preceding proviso, the Bank agrees that it shall not offset, deduct or claim against the Laurus Restricted Account unless and until Laurus has notified the Bank in writing that all of the Company's obligations under the Purchase Agreement and the Related Agreements have been performed. 4. The Company and the Bank agree that the maintenance by the Bank of the Laurus Restricted Account shall be as agent for Laurus. The Bank shall be responsible for the performance of only such duties as are set forth herein. The Bank's duties hereunder, however, are merely ministerial, and the Bank shall have no liability or obligation to the Company or Laurus or to any other person for any act or omission of the Bank in connection with the performance of the Bank's duties in servicing and/or maintaining the Laurus Restricted Account, except for acts of gross negligence or willful misconduct by Bank. IN NO EVENT, HOWEVER, SHALL THE BANK HAVE ANY RESPONSIBILITY FOR CONSEQUENTIAL, INDIRECT, SPECIAL OR EXEMPLARY DAMAGES OR LOST PROFITS, WHETHER OR NOT IT HAS NOTICE THEREOF, AND REGARDLESS OF THE BASIS, THEORY OR NATURE OF THE ACTION UPON WHICH THE CLAIM IS ASSERTED, NOR SHALL IT HAVE ANY RESPONSIBILITY OR LIABILITY FOR THE VALIDITY OR ENFORCEABILITY OF ANY SECURITY INTEREST OR OTHER INTEREST OF LAURUS OR THE COMPANY IN THE LAURUS RESTRICTED ACCOUNT. In furtherance of and without limiting the foregoing, the Company and Laurus agree that the Bank shall not be liable for any damage or loss to them for any delay or failure of performance arising out of the acts or omissions of any third parties, including, but not limited to, various communication services, courier services, the Federal Reserve system, any other bank or any third party who may be affected by funds transactions, fire, mechanical, computer or electrical failures or other unforeseen contingencies, strikes or any similar or dissimilar cause beyond the reasonable control of the Bank. This paragraph shall survive the termination of this Agreement. 2 5. Except where the Bank has been grossly negligent or has acted in bad faith, each of Laurus and the Company and their respective successors and assigns will release the Bank from and shall indemnify and hold the Bank harmless from and against any and all losses, claims, damages, liabilities, costs and expenses (including, without limitation, reasonable counsel fees, whether arising in an action or proceeding among the parties hereto or otherwise, without regard to the merit or lack of merit thereof) to which the Bank may become subject, or which it may suffer or incur, arising out of or based upon this Agreement or the actions contemplated hereby. This paragraph shall survive termination of this Agreement. 6. The Bank shall be fully protected in acting on any order or direction by Laurus respecting the items received by the Bank or the monies or other items in the Laurus Restricted Account without making any independent inquiry whatsoever as to Laurus' rights or authority to give such order or direction or as to the application of any payments made pursuant thereto. 7. Nothing in this Agreement shall be deemed to prohibit the Bank from complying with its customary procedures in the event that it is served with any legal process with respect to the Laurus Restricted Account. 8. The rights and powers granted in this to Laurus have been granted in order to protect and further perfect its security interests in the Laurus Restricted Account (including any amounts from time to time on deposit therein) and are powers coupled with an interest and will be affected neither by any purported revocation by the Company of this Agreement or the rights granted to Laurus hereunder or by the bankruptcy, insolvency, conservatorship or receivership of the Company or the Bank or by the lapse of time. 9. This Agreement may not be amended or waived except by an instrument in writing signed by each of the parties hereto. This Agreement may be terminated by the Bank upon giving the Company and Laurus thirty (30) days prior written notice. Laurus shall designate a successor bank on or prior to the effective date of such termination and the Bank shall deliver the balance in the Laurus Restricted Account to such successor bank. Any notice required to be given hereunder may be given, and shall be deemed given when delivered, via telefax, U.S. mail return receipt requested or nationally recognized overnight courier to each of the parties at the address set forth above. This Agreement may be executed in any number of counterparts, each of which shall be an original and all of which, when taken together, shall constitute one agreement. Delivery of an executed signature page of this Agreement by facsimile transmission shall be effective as delivery of a manually executed counterpart hereof or thereof, as the case may be. This Agreement shall be governed by, and construed in accordance with, the laws of the State of New York, without regard to its conflict of laws principles. This Agreement sets forth the entire agreement between the parties hereto as to the matters set forth herein and supersede all prior communications, written or oral, with respect to the matters herein. EACH OF THE PARTIES HERETO HEREBY WAIVES ANY RIGHT TO TRIAL BY JURY WITH RESPECT TO ANY CLAIM, ACTION, SUIT OR PROCEEDING ARISING OUT OF OR CONTEMPLATED BY THIS AGREEMENT. THE BANK, THE COMPANY AND LAURUS EACH HEREBY SUBMIT TO THE EXCLUSIVE JURISDICTION OF THE FEDERAL AND NEW YORK STATE COURTS LOCATED IN THE COUNTY OF NEW YORK IN CONNECTION WITH ANY DISPUTE IN WHICH THE BANK IS NAMED AS A PARTY RELATED TO THIS AGREEMENT OR ANY MATTERS CONTEMPLATED HEREBY OR THEREBY. ANY DISPUTE SOLELY BETWEEN THE COMPANY AND/OR ANY OF ITS SUBSIDIARIES, ON ONE HAND AND LAURUS, ON THE OTHER HAND, SHALL BE RESOLVED IN ACCORDANCE WITH SECTION 11.1 OF THE PURCHASE AGREEMENT. * * * * 3 Agreed and accepted this 14th day of May, 2004. NORTH FORK BANK By: ------------------------------------- Name: Title: LAURUS MASTER FUND, LTD. By: ------------------------------------- Name: Eugene Grin Title: Director EPIXTAR CORP. By: ------------------------------------- Name: Title: 4 EXHIBIT A RELEASE NOTICE TO: NORTH FORK BANK 404 FIFTH AVE., SUITE 1 NEW YORK, NY 10018 RE: ACCOUNT NAME: EPIXTAR CORP. ACCOUNT NUMBER: 2704051586 Reference is made to that certain Laurus Restricted Account Agreement, dated as of May 14, 2004 (the "Laurus Restricted Account Agreement"), among North Fork Bank (the "Bank"), Epixtar Corp. (the "Company"), and Laurus Master Fund, Ltd. ("Laurus"). This is to notify you that Laurus authorizes the release of $_____________ (the "Release Amount") from the account referenced above in accordance with the terms of the Laurus Restricted Account Agreement. Within one business day following the receipt of this Release Notice, the Bank hereby agrees to wire the Release Amount (or, in the event that the amount in the Laurus Restricted Account is less than the Release Amount, such lesser amount) to the following account in accordance with the wire instructions set forth below: [INSERT WIRE INSTRUCTIONS] LAURUS MASTER FUND, LTD. By: ---------------------------------------- Name: Title: Agreed and accepted this __ day of ___________ 200__. NORTH FORK BANK By: ______________________________ Name: Title: 5 EXHIBIT B Laurus Restricted Account o Bank: North Fork Bank o Bank Routing Number: 021407912 Attn: Sheldon Selman Phone: 212-967-9400 Account Name: Epixtar Corp. Account #: 2704051586 6 EX-4.11.5.1 9 b332632_ex4115-1.txt LETTER RELATING TO RESTRICTED ACCOUNT AGREEMENT Exhibit 4.11.5.1 LAURUS MASTER FUND, LTD. 825 Third Avenue, 14th Floor New York, New York 10022 May 14, 2004 Epixtar Corp. 11900 Biscayne Boulevard, Suite 262 Miami, Florida 33181 Attn: David Srour Re: Laurus Restricted Account: Account Number 2704051586, Account Name: Epixtar Corp., maintained at North Fork Bank (the "Laurus Restricted Account"). Reference is made to (i) that certain Securities Purchase Agreement, dated as of May 14, 2004 (as amended, modified or supplemented from time to time, the "Purchase Agreement"), by and between Epixtar Corp., a Florida corporation (the "Company"), and Laurus Master Fund, Ltd. (the "Purchaser") and (ii) that certain Laurus Restricted Account Agreement, dated as of May 14, 2004 (as amended, modified or supplemented from time to time, the "Laurus Restricted Account Agreement"), by and among the Company, Laurus and North Fork Bank (the "Bank"). Capitalized terms used but not defined herein shall have the meanings ascribed them in the Purchase Agreement or the Laurus Restricted Account Agreement, as applicable. Pursuant to the Section 3.2 of the Purchase Agreement, the Company is required to place $1,930,000 in the Laurus Restricted Account, and, subject to the provisions of this letter, the Purchase Agreement and any Related Agreement, maintain such amount in the Laurus Restricted Account for as long as the Purchaser shall have any obligations outstanding under the Note and to assign the Laurus Restricted Account for the benefit of the Purchaser as security for the performance of the Company's obligations to the Purchaser. The Purchaser and the Company desire to clarify certain aspects regarding the use of funds contained in the Laurus Restricted Account, and for good consideration, the receipt and sufficiency of which is here acknowledged, the Company and the Purchaser agree that, so long as no Event of Default (as defined in the Note) has occurred and is continuing beyond any applicable grace period (subject to such Event of Default being waived by the Purchaser), at such time as (x) the Registration Statement referred to, and defined, in the Registration Rights Agreement has become effective, (y) the entire amount of indebtedness outstanding (including, without limitation, principal, interest and fees) under the Bridge Loan Documents has either been fully converted into Common Stock and/or been repaid in full in cash and (z) the Purchaser shall have received written notification satisfactory to it from the Lustigman Firm, P.C., special Federal Trade Commission ("FTC") counsel to the Company, that the Stipulated Order for Permanent Injunction and Final Judgment with respect to that certain action instituted against the Company and certain of its Subsidiaries by the FTC on October 30, 2003 (the "Stipulated Order") has been executed by the Company and by FTC Staff Counsel, and the Stipulated Order has been forwarded to FTC headquarters in Washington D.C. for review and final approval by the FTC, then the Purchaser shall direct the Bank, pursuant to a Release Notice (as defined in the Laurus Restricted Account Agreement), to wire the entire amount of funds contained in the Laurus Restricted Account to such bank account as the Company may direct the Purchaser in writing. In addition, at such time as (and not until) the aggregate outstanding Principal Amount (as defined in the Note) of the Note has been reduced (through voluntary or mandatory prepayments or conversions) to $1,930,000, promptly following any conversion of a Monthly Principal Amount (as defined in the Note) or such other Principal Amounts into Common Stock of the Company (such event, a "Conversion"), the Purchaser shall direct the Bank, pursuant to a Release Notice (as defined in the Laurus Restricted Account Agreement), to wire an amount of funds equal to the corresponding dollar amount by which the aggregate Principal Amount of the Note has been reduced pursuant to such a Conversion from the Laurus Restricted Account to such bank account as the Company may direct the Purchaser in writing. This letter may not be amended or waived except by an instrument in writing signed by the Company and the Purchaser. This letter may be executed in any number of counterparts, each of which shall be an original and all of which, when taken together, shall constitute one agreement. Delivery of an executed signature page of this letter by facsimile transmission shall be effective as delivery of a manually executed counterpart hereof or thereof, as the case may be. This letter shall be governed by, and construed in accordance with, the laws of the State of New York. This letter sets forth the entire agreement between the parties hereto as to the matters set forth herein and supersede all prior communications, written or oral, with respect to the matters herein. If the foregoing meets with your approval please signify your acceptance of the terms hereof by signing below. Signed, LAURUS MASTER FUND, LTD. By:____________________ Name: Title: Agreed and Accepted this 14th day of May, 2004. EPIXTAR CORP. By:_____________________ Name: Title: EX-10.8 10 b331272_ex10-8.txt MASTER SERVICE Exhibit 10.8 MASTER SERVICES AGREEMENT THIS MASTER SERVICES AGREEMENT (the "Agreement") is entered into as of March 30, 2001 ("Effective Date"), by and between eBillit, Inc., a Delaware corporation ("EBI"), and National Online Services, Inc. a Florida corporation ("Client"). WHEREAS, Client is a provider of certain Internet and/or telecommunications related products and services; and WHEREAS, EBI is engaged in the business of providing validation, billing, collection by and related services to the Internet and telecommunications industries; and WHEREAS, EBI is willing to provide its services to Client, and Client desires to obtain such services from EBI, upon the terms and conditions stated herein; NOW, THEREFORE, the parties hereto agree as follows: 1. DEFINITIONS. A certain terms used herein are defined in the attached Exhibit A and are incorporated herein by reference. " 2. EBI SERVICES. EBI shall provide one or more of the following services (each a "Service Option") as more fully described on the referenced Schedules, attached hereto and, made a part hereof. Unless, marked as initially ordered below, Service Options may be ordered by Client in accordance with the terms set forth in the applicable Schedule.
Initial Schedule Service Options Order -------- --------------- ------- I Validation/Registration ( ) II PhoneBill Services (Telco Billing) (X) III DirectBill Services (Client-Branded Billing) ( ) - with -WebBill option ( ) IV Credit Card Processing ( )
National Online Services Master Services Agreement V Automated Clearing House (ACH) ( ) VI End-User Inquiry (required with Service Option II or III) (X) VII Collection Services ( )
3. TERM. The term of this Agreement shall be for two (2) years from the Effective Date ("Initial Term"), and shall automatically renew for successive terms of two (2) years (each a "Renewal Term") unless either party gives the other party ninety (90) days prior written notice of its desire to not renew at least ninety (90) days prior to the scheduled renewal, or otherwise terminates this Agreement in accordance with Section 12. The Initial Term and any Renewal Term shall be referred to collectively herein as "Term". 4. CLIENT SUBMISSION AND EBI EDIT. Where applicable to the ordered Service Options, Client shall submit to EBI its Billing Transactions in a data format acceptable to EBI. Upon receipt of Client's Billing Transactions, EBI shall subject the Billing Transactions to its proprietary edit process (the "EBI Edit Process"), which may screen the Billing Transactions for, among other things, compliance with EBI's billing policies, billing coverage, regulatory requirements, syntax errors and other requirements as EBI may reasonably determine from time to time. EBI shall provide reasonable notification of any changes or restrictions in its edit criteria. Client shall be responsible for screening its Billing Transactions to reasonably exclude records that are not likely to pass the EBI Edit Process. If any of Client's Billing Transactions fail to satisfy the criteria of the EBI Edit Process, EBI shall return such Billing Transactions to Client and EBI shall have no further responsibility for any such returned Billing Transactions.. 5. SERVICE FEES. EBI shall be entitled to withhold from its disbursements to Client, or otherwise invoice Client, the fees and charges set forth on Exhibit B, attached hereto (collectively "Fees"). In the event EBI invoices Client for its Fees, such invoices shall be due and payable within five (5) business days of receipt by Client. EBI shall be entitled to interest on any past-due Fees at the rate of 18% per annum or the maximum rate allowable by law, whichever, is less. After the first. annual anniversary of this Agreement, EBI may adjust its Fees with thirty (30) days prior written notice to Client, provided, however, that the aggregate effect of such adjustment shall not exceed ten percent (10%) in any 12 month period. National Online Services Master Services Agreement 6. TAXES. Each party shall be responsible for timely remitting such party's applicable Taxes (if any) to the appropriate taxing authorities. In no event shall either party be responsible for the other party's obligation to remit such other party's Taxes. Client shall either (i) include, in the face amount of each Billing Transaction, the amount of any Taxes applicable to such Billing Transaction, or (ii) provide written instructions to EBI directing EBI to apply specific Taxes to the Billing Transactions. Client agrees to indemnify and hold EBI, its directors, officers, employees, agents, and representatives harmless from and against any liability or loss resulting from any Taxes including, without limitation, any penalties, interest, additions to Tax, Tax surcharges and other Tax-related costs payable or incurred in relation to Client's Services or the Billing Transactions except; however, that none of the foregoing shall apply in the event of EBI's failure to remit actual collected Taxes to a taxing authority, where applicable, on a timely basis. 7. CLIENT REPRESENTATIONS AND WARRANTIES. Client represents and warrants to EBI that, throughout the Term of this Agreement, Client shall be in compliance with a11 applicable regulations and policies including, but not limited to, federal, state, and local legal and regulatory requirements (collectively the "Laws") and the billing and collection guidelines contained in Exhibit C, attached hereto, applicable to any of Client's Services, including, without limitation, all certification requirements, tariffs, rate caps, validation requirements, preamble, disclosure, advertising, solicitation, and content applicable to Client's Services. The warranties set forth in this paragraph are in lieu of any other warranty, express, implied or statutory. 8. EBI's REPRESENTATION AND WARRANTY. EBI represents and warrants that it has the full power and authority to enter into this Agreement and, when executed and delivered by EBI, this Agreement will constitute the legal, valid and binding obligation of EBI. EBI further represents and warrants that it is in compliance with all applicable Laws with respect to the services to be provided hereunder, and that it shall maintain such compliance throughout the Term of this Agreement. This warranty is in lieu of any other warranty, express, implied or statutory. National Online Services Master Services Agreement 9. PROOF OF COMPLIANCE. Each party agrees to provide written proof of its compliance, with respect to its respective obligations under Sections 7 or 8 above, to the other party within five (5) business days of such other party's written request' Each party shall have the right to immediately suspend its performance under this Agreement, whether in whole or in part, without liability to the other party in the event that such other party does not provide satisfactory written evidence of such compliance. Each party agrees to notify the other party in writing, as soon as reasonably possible, of any instances where such party is not in compliance with applicable obligations under Sections 13 and 14. 10. LIMITATION OF LIABILITY. IN NO EVENT WILL EITHER PARTY BE LIABLE TO THE OTHER PARTY FOR ANY LOSS OF PROFITS, LOSS OF USE, LOSS OF GOODWILL, CONSEQUENTIAL, SPECIAL OR PUNITIVE DAMAGES REGARDLESS OF THE FORM OF ANY CLAIM, WHETHER IN CONTRACT OR IN TORT OR WHETHER FROM BREACH OF THIS AGREEMENT, IRRESPECTIVE OF WHETHER SUCH PARTY HAS BEEN ADVISED OR SHOULD BE AWARE OF THE POSSIBILITY OF SUCH DAMAGES. CLIENT HEREBY ACKNOWLEDGES AND AGREES THAT EBI'S LIABILITY WITH RESPECT TO THE PERFORMANCE OF EBI'S SERVICES SHALL BE LIMITED TO THE AMOUNT OF FEES PAID BY CLIENT TO EBI FOR THE AFFECTED SERVICES PERFORMED BY EBI. 11. INDEMNIFICATION. (a) By Client. Client hereby agrees to indemnify and hold EBI and its directors, officers, employees, agents, and representatives harmless from and against all obligations, liabilities, claims, demands, losses, damages, costs or expenses, including attorney's fees (collectively "Claims"), arising out of or relating to: (i) Client's material breach of any representation, warranty, covenant or obligation hereunder; (ii) Client's inadvertent or intentional submission of non-approved Billing Transactions; (iii) Client's Services; or (iv) the Billing Transactions processed by EBI in accordance with the terms of this Agreement. In the event that EBI is served as a defendant in any Claim arising out of any of the foregoing, EBI may, at its option, engage its own attorneys to defend itself, and Client shall pay all reasonable attorney fees, costs and expenses incurred by EBI. National Online Services Master Services Agreement (b) By EBI. EBI hereby agrees to indemnify and hold Client, its directors, officers, employees, agents, and representatives harmless against any and all Claims arising out of or relating to: (i) EBI's gross negligence or willful misconduct in the performance of its duties hereunder; or (ii) any material breach by EBI of any representation or warranty under this Agreement. 12. TERMINATION FOR DEFAULT. Either party may terminate this Agreement, effective immediately with written notice to the other party upon any of the following events: (a) The other party defaults on any payment obligation hereunder and fails to cure such payment default within five (5) business days of written notice of such payment default to the defaulting party by the non-defaulting party, or (b) The other party has violated a representation or warranty contained in this Agreement and such violation remains uncured after five (5) business days following written notice of such violation from the non-defaulting party specifying the nature of the violation; or (c) The other party defaults with respect to any other provision of this Agreement and fails to cure such default within thirty {30) days of written notice of such default to the defaulting party by the non-defaulting party; or (d) The other party has (i) filed a voluntary petition in bankruptcy or voluntary petition or an answer seeking reorganization, arrangement, readjustment of its debts, or any other relief under the Federal Bankruptcy Code or under any other insolvency act or law, now or hereafter existing, or (ii) a receiver or trustee appointed involuntarily, and any petition or action is not suspended, stayed or dismissed within sixty (60) days after its filing or appointment, as the case may be; or (e) Either party determines, in its reasonable discretion, that its business image, reputation or goodwill is being harmed by the services of the other party and such other party has not satisfactorily cured the indicated problem within ten (10) business days of notice thereof from the first party. National Online Services Master Services Agreement 13. EFFECT OF TERMINATION. The parties agree that the termination of this Agreement for any reason whatsoever, shall not affect or terminate any obligation or liability incurred or assumed by either party prior to the effective date of termination of this Agreement including, without limitation, payment of amounts accrued or owing hereunder. 14. CONFIDENTIALITY. (a) As used in this Agreement "Confidential Information" of either party shall mean any information including, without limitation, trade secrets, technical and other information relating to the service or business operations of a party (the "Disclosing Party") that is disclosed either orally or in writing to the other Party (the "Receiving Party") pursuant to this Agreement or otherwise if such information is marked "Confidential", bears a marking of like import, or is or was identified by the Disclosing Party as "Confidential" at or about the time of transmittal to or receipt by the Receiving Party. Orally disclosed information shall be considered Confidential Information if it is identified as such at the time of disclosure by the Disclosing Party and within thirty (30) days after oral disclosure thereof the Disclosing party confirms in writing to the Receiving Party the confidential nature of such 'Information. "Confidential Information" shall also include any equipment, hardware or software made available to a Receiving Party by a Disclosing Party that includes or represents a tangible manifestation of a Party's "Confidential Information", whether or not such equipment bears any confidential legend or marking. (b) Each party agrees that Confidential Information of the other party which is disclosed or obtained by it hereunder or otherwise, shall, subject to the terms and conditions of this Agreement, be retained in confidence and shall be protected to the same extent and in the same manner as comparable Confidential Information of the Receiving Party, but no less than a reasonable standard of care. (c) Information shall not be deemed Confidential Information, and Receiving Party shall have no obligation under this provision with respect to any: (i) Information that now or hereinafter comes into the public domain without breach of this Agreement; National Online Services Master Services Agreement (ii) Information already in the possession of or known to the Receiving Party at the time of disclosure as evidenced by prior written documentation thereof; (iii) Information rightfully and lawfully received by a Receiving Party from a third party without breach of this Agreement or any other agreement as evidenced by existing written documentation thereof; (iv) Information developed independently or discovered by a Receiving Party without use of the Disclosing Party's Confidential Information as evidenced by existing written documentation thereof; (v) Information approved for release by the written authorization of the Disclosing Party; or (vi) Information disclosed pursuant to the requirement or request of a governmental agency or court of competent jurisdiction to the extent such disclosure is required by a valid law, regulation or court order provided, however that reasonable prior written notice is given by the Receiving Party to the Disclosing party of any such requirement or request sufficient to permit the Disclosing party to seek an appropriate protective order or exemption from such requirement or request. (d) All tangible forms of information, including, but not limited to documents, drawings, specifications, prototypes, samples and the like received hereunder by a Receiving party shall remain the property of the Disclosing party. Upon written request by a Disclosing Party, the Receiving party shall return to the Disclosing Party all tangible forms of the Disclosing Party's Confidential Information received by Receiving party, together with all copies thereof. 15. CHOICE OF LAW AND VENUE. THE VALIDITY OF THIS AGREEMENT, ITS CONSTRUCTION, INTERPRETATION, AND ENFORCEMENT, AND THE RIGHTS OF THE PARTIES HERETO SHALL BE DETERMINED UNDER, GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF CALIFORNIA. THE PARTIES AGREE THAT ALL ACTIONS OR PROCEEDINGS ARISING IN CONNECTION WITH THIS AGREEMENT AND NOT {OTHERWISE SUBJECT TO RESOLUTION BY ARBITRATION HEREUNDER, SHALL BE BROUGHT EXCLUSIVELY IN AND VENUE SHALL BE PROPER ONLY IN THE STATE AND FEDERAL COURTS LOCATED IN THE COUNTY OF SANTA CLARA, STATE OF CALIFORNIA. EACH OF THE PARTIES HERETO WAIVES, TO THE EXTENT PERMITTED UNDER APPLICABLE LAW, ANY RIGHT EACH MAY HAVE TO ASSERT THE DOCTRINE OF FORUM NON CONVENIENS OR TO OBJECT TO VENUE TO THE EXTENT ANY PROCEEDING IS BROUGHT IN ACCORDANCE WITH THIS SECTION. National Online Services Master Services Agreement 16. PUBLIC ANNOUNCEMENTS. Neither party may use the other party's name in any public announcements or public disclosures nor shall either party disclose the terms of this Agreement, without the prior written consent of the other party. 17. NOTICES. All notices and other communications that are required or may be given hereunder shall be in writing and shall be delivered personally, sent by U.S. mail with return receipt requested, by facsimile if receipt is confirmed by means other than the facsimile's electronic confirmation, or by an express carrier with receipt confirmation. All notices and other communications shall be deemed given when actually received by a party as evidenced by an appropriate confirmation. Notice shall be directed to a party at its address set forth below or such other address as shall be given in writing by such party. eBillit, Inc. National Online Services, Inc. 5883 Rue Ferrari 11900 Biscayne Boulevard San Jose, CA 95138 Miami, Florida 33181 Attention: General Council Attention: William D. Rhodes FAX: 408-362-2796 FAX: 305-899-7242 18. DISPUTE RESOLUTION AND ARBITRATION. Except for an action seeking a temporary restraining order or injunction related to the purposes of this Agreement, or a suit to compel compliance with this dispute resolution process, the parties shall use the following alternative dispute resolution procedures as their sole remedy with respect to any claim, dispute, or other controversy arising out of or relating to this Agreement or its breach. (a) Dispute Resolution. At the written request of a party to the other party, each party shall appoint an officer or employee representative to meet, negotiate in good faith, and attempt to resolve any dispute arising under this Agreement. The location, format, frequency, duration, and conclusion of these discussions shall be left to the discretion of the parties representatives. Upon the mutual agreement of the parties, the designated representatives may elect to utilize non-binding mediation to assist in the settlement of the dispute. Discussions and correspondence among the representatives, for purposes of these negotiations, shall be treated as Confidential Information developed for purposes of settlement, exempt from discovery and production, and which shall not be admissible in any arbitration or related action absent the mutual written agreement of the parties. Documents identified in, or provided with such communications, that are not prepared for purposes of the negotiations, are not so exempted and may, if otherwise admissible, be admitted as evidence in any arbitration or related action hereunder. National Online Services Master Services Agreement (b) Arbitration, If the negotiations do not resolve the dispute within sixty (60) calendar days of the initial written request for a meeting pursuant to Section 23 (a) hereof, the dispute shall be submitted to binding arbitration by a single arbitrator pursuant to the Commercial Arbitration rules of the American Arbitration Association then in effect (the "Rules"). A party may demand such arbitration in accordance with the procedures set out in those Rules. The arbitration hearing shall be commenced within sixty (60) calendar days of the date of the demand for arbitration. The arbitration shall be held in San Jose, Califomia. Judgment upon the award rendered by the arbitrator may be entered in any court of competent jurisdiction. Each party shall bear its own costs of these procedures. A party seeking discovery shall reimburse the responding party the reasonable costs of production of documents (including search time and reproduction costs). The parties shall share equally the fees of the arbitration and the arbitrator. 19. OWNERSHIP RIGHTS. EBI, and its licensors, shall own all right, title and interest in and to the EBI Systems (whenever developed), including but not limited to all Intellectual Property Rights therein, if any, and Client shall have no rights therein. 20. GENERAL PROVISIONS. (a) Attorney's Fees. In the event of any dispute, claim, arbitration or legal proceeding arising out of or relating to this Agreement, the prevailing party thereto shall be entitled to reimbursement from the other of all reasonably attorney's fees and costs incurred in connection therewith. National Online Services Master Services Agreement (b) Severability. If any provision of this Agreement is found to be invalid by any court, the invalidity of such provision shall not affect the validity of the remaining provisions hereof. (c) Captions. The paragraph headings contained in this Agreement are for reference purposes only and shall not affect in any way the meaning or interpretation of this Agreement. (d) Assignment. Either party may assign this Agreement to an entity holding a majority ownership interest in the assigning party or in which the assigning party holds a majority ownership interest. In addition, Client may assign, in whole or in part, its right to payments hereunder to a third party. Neither party may otherwise assign any of its rights or obligations hereunder without the prior written consent of the other party, which consent shall not be unreasonably withheld. All assignments shall be in writing, duly signed by an officer of the assigning party. This Agreement shall be binding upon and inure to the benefit of the successors and permitted assigns of the parties. (e) Amendments; No Waiver. Except as otherwise provided herein, this Agreement may be amended or modified only by a written instrument executed and delivered by duly authorized representatives of the parties hereto. No waiver of any right hereunder shall be deemed to be a waiver of the same or any other right on any other occasion. (f) Third Party Rights. The parties do not intend to confer any benefit hereunder on any person or entity other than the parties hereto. (g) Further Assurances. The parties agree to do such further acts and to execute and deliver such additional agreements and documents as the other(s) may reasonably request to consummate, evidence or confirm the agreements contained herein and the matters contemplated hereby. (h) Force Majeure. Neither party shall be deemed in default of this Agreement to the extent that any delay or failure in performance of its obligation results, without its fault or negligence, from any cause beyond its control, including, but not limited to, acts of God, acts of civil or military authority, government regulation, embargoes, epidemics, war, terrorist acts, riots, insurrections, fires, floods, earthquakes, nuclear accidents, strikes, power losses, unusually server weather conditions, inability to secure third party products, services, or transportation facilities, or act of or omission of transportation common carriers (each an "Interrupt Event"). Upon the occurrence of an Interrupt Event that causes either party to be unable to perform its obligation's hereunder, such party shall: (i) immediately notify the other party in writing of such Interrupt Event and its expected duration; and (ii) take all commercially reasonable steps to recommence performance of its obligations hereunder. In the event that an Interrupt Event delays a party's performance of its obligations by more than fifteen (15) days following notice by such party, the other party may terminate this Agreement without penalty immediately upon written notice to the party whose performance is delayed or prevented. National Online Services Master Services Agreement (i) Counterparts. This Agreement may be executed in separate counterparts, each of which shall be deemed an original, and both of which together shall constitute one and the same instrument. (j) Integration of Agreement. This Agreement, together with the Exhibits and Schedules hereto, contains the entire understanding of the parties with respect to its subject matter and supersedes all prior and contemporaneous agreements, representations and understandings among the parties, whether oral or written, relating to the subject matter hereof. (k) No Agency. Neither EBI nor Client is an agent, partner, joint venture, trustee, fiduciary or legal representative of the other party and neither EBI nor Client has authority to act for or incur any obligation on behalf of or in the name of the other party other than as expressly set forth in this Agreement. (l) Corporate Authority. The parties hereto represent and warrant that they have the capacity, power and authority to enter into this Agreement, and that the individuals signing on behalf of both parties have the authority to so sign. National Online Services Master Services Agreement IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the Effective Date set forth above. eBillit, Inc. (EBI) National Online Services, Inc. (Client) By: By: Name: Name: Title: Title: Date: Date: National Online Services Master Services Agreement EXHIBIT "A" Definition of Certain Terms The following terms shall have the meaning ascribed thereto throughout this Agreement and any Exhibits and Schedules attached hereto: "Account" shall mean a separate account of Client under which Billing Transactions and settlement funds are tracked and reported. "Account Number" shall mean the number, assigned by EBI, which is used to reference a particular Account. "Adjustment" shall mean a post-billing deduction made to an End-User's bill with respect to Client's Billing Transactions, usually arising from End-User disputes regarding a billed amount. Adjustments may be initiated by (i) Telcos, where applicable, in accordance with the Billing Contracts, (ii) by Client at its discretion, or (iii) by EBI in accordance with this Agreement. "ANI" shall mean Automatic Number Identification, which refers to the network capture of a dialing party's originating telephone number. For many dialed services, the ANI is used as the BTN (see below). "Billing Contract" shall mean a billing and collection agreement entered into between EBI and a LEC and/or certain third parties that contract directly with such LEC. Billing Contracts permit the inclusion of approved types of Billing Transactions on the LEC's local telephone bill to business and residential consumers. A current list of existing Billing Contracts as of the Effective Date is attached to Schedule II as Exhibit II-A. "BTN" shall mean a billing telephone number, which identifies the telephone line to which a Billing Transaction was charged by an End-User. "Billing Transaction". shall mean an electronic data record evidencing the use by an End-User of Client's Service, which includes relevant information regarding such use. "Client's Service" shall mean a service provided by a Service Provider which gives rise to a Billing Transaction or otherwise results in or necessitates a service to be performed by EBI hereunder. "Deposit Month" shall mean a particular calendar month within which Billing Transactions are processed, tracked and reported by EBI. "EBI Edit Process" shall mean EBI's internal edit checks applicable to the formatting and/or content of Billing Transactions as further described under Section 4 of the Agreement. National Online Services Master Services Agreement "EBI Reserve" shall mean an amount withheld, from the amount otherwise owed to Client with respect to Billing Transactions, to protect EBI from credit losses or otherwise to cover other reserves or offsets, other than Uncollectables imposed by a Telco. "EBI Systems" shall mean all of FBI's proprietary systems developed and owned by EBI or licensed to EBI, including but not limited to any software, processes and procedures related thereto that are used by EBI in the performance of its obligations hereunder. EBI Systems shall also include any improvements, enhancements, customizations, and upgrades' thereto whether jointly developed or otherwise. "End-User" shall mean a consumer of Client's Service, including, but not limited to, an individual, corporation or other entity. "End-User Inquiry" shall mean oral or written contact from an End-User regarding a billing charge usually as a result of the End-User disputing such charge or otherwise seeking an explanation. End-User Inquiries are either handled by EBI or Client in accordance with the attached Schedule VI, or handled by a Telco in accordance with such Telco's inquiry policies and applicable regulations. "Fees" shall mean those fees set forth on Exhibit B to the Agreement; which are applicable to the Service Options ordered by Client. "Intellectual Property Rights" shall mean all forms of proprietary rights, titles, interests, and ownership relating to patents, copyrights, trademarks, service marks, trade names, trade dresses, tradesecrets, know-how, mask works, moral rights, and all similar rights of every type that may exist now or in the future under the laws of any jurisdiction. "LEC" shall mean a local exchange carrier within the telecommunications industry that, among other things, provides dial tone service to business and/or residential consumers. "Reject" shall mean any Client Billing Transaction that fails to pass the EBI Edit Process as described in paragraph 4(a) hereof. "Service Provider" shall mean either Client or Client's customer, as applicable, where such entity provides services to End-Users giving rise to Billing Transactions. In the event that Service Provider is not Client, Client is responsible for all actions, inactions, errors and omissions of Service Provider with respect to the Billing Transactions. National Online Services Master Services Agreement "Taxes" shall mean all federal, state or local sales, use, excise, gross receipts or other taxes or tax-like charges imposed on or with respect to any service or transaction which is the subject of this Agreement. "Telco" shall mean a LEC with which EBI, directly or indirectly, maintains a Billing Contract. A current list of such Telcos as of the Effective Date is attached to Schedule II as Exhibit II-A. "Term", "Initial Term" & "Renewal Term" are each defined in Section 3 of the Agreement. National Online Services Master Services Agreement EXHIBIT "C" Billing and Collections Guidelines EBI has adopted the anti-cramming consumer protection guidelines of the Coalition to Ensure Responsible Billing (CERB). By adopting these guidelines, EBI is committed to billing standards and practices to ensure a maximum level of consumer protection. Client hereby agrees to the following as consideration for EBI billing for its services. 1. COMPANY INFORMATION Client shall provide EBI with the following information: o Client's company name, including dba's, and address. o Names of all officers, directors and principals of Client. o Proof of corporate or partnership status. o Copies of certifications as required. o Foreign corporation filings as required. o Any applicable tariffs upon request. o The names and addresses of any telemarketing companies to be used by the Client. o The names and addresses of any third party verification companies to be used by the Client. 2. SCREENING OF PROGRAMS, PRODUCTS AND SERVICES Prior to EBI's billing for any Client services, Client shall provide EBI with the following information: o A complete set of its marketing materials pursuant to the programs or services to be billed by EBI. o A complete set of its advertisements (print or other media) pursuant to the programs or services to be billed by EBI. o Applicable fulfillment package (which must include cancellation information if not included elsewhere and a toll free Client service telephone number). o Complete scripts for sales verification. Client shall not change scripts or programs without first providing changes to EBI. o Honest, clear, and understandable text phrase for appearance on the bill. NOTE: EBI will not provide billing for services employing the following practices and Client hereby agrees it will not provide Billing Transactions to EBI for the following: o Box, sweepstakes, or contest-type entry forms. o Negative option sale offers. o 800 pay-per-call o Collect callback o Phantom billing (charging for calls never made or services never provided). o Such other programs, products, or services that regulatory agencies, EBI or Telcos, where applicable, determine to be deceptive to consumers. National Online Services Master Services Agreement EXHIBIT "C" Billing and Collections Guidelines 3. COMPLIANCE MONITORING EBI requires Client to: o Minimize End-User inquiries and complaints it receives. o Minimize End-User complaints to government agencies. o Maintain up-to-date records regarding complaints and inquiries that it receives. o Promptly adopt action plans to respond to complaints and inquiries. o Assist and cooperate with investigations of End-User disputes. o Promptly cease billing any recurring charges to an End-user when there is a clear indication that such End-User is no longer utilizing Client's product or service. 4. MANDATORY AUTHORIZATION Where State or Federal agencies (or Telcos, where applicable) require consumer pre-authorization for the services, products, or programs provided by Client, Client must employ one of the following forms of authorization. Such authorization must be retained for a period of two (2) years and made available upon request. Additionally, if State/Federal agencies or Telcos amend their requirements, Client is responsible for its full compliance thereto: o Recorded independent third party verification o Written or electronic letter of authorization (LOA) o Written or electronic sales order o Voice Recording of telephone sales authorization. An authorization must legibly include the following to be valid: o The date of authorization. o The telephone number and, where practical, name and address of the consumer. o Assurance that the consumer is qualified to authorize billing. o A complete description of the product or service. o A description of the applicable charges. o An explicit acknowledgment by the consumer as to how the charges for the product or service will appear on his/her bill. o Affirmative acceptance by the consumer of the offer. o A toll-free number that subscribers may call to make inquiries concerning the service. In addition, authorization verified by an independent third party must include: o An initial statement that the purpose of the verifications is to confirm the consumer's intention to accept the sales offer. o A statement that the service provider is not affiliated with a LEC, where there is no affiliation. o A unique consumer identifier. o A review by third party personnel of the entire verification where the verification is automated. An Independent third party verifier must meet the following criteria: o It must be completely independent of the service provider and the telemarketer. o It must not be owned, managed, controlled or directed by Client or the telemarketer. o It must not have any financial incentive in the completion of the sale. o It must operate in a location physically separate from the service provider and the telemarketer. National Online Services Master Services Agreement EXHIBIT "C" Billing and Collections Guidelines 5. HIGH STANDARD BILLING PRACTICES Central to a consumer's right to ensure that they have not been billed inappropriately is the ability to understand and read the bill. Client shall use it's best efforts to ensure that the information provided to EBI fairly and accurately describes the service(s) provided to the End-User including, but not limited to: o Identification of the Client providing the services. o Detailed description of products or services. o Detailed identification of the charges. 6. END-USER SATISFACTION As End-Users must be able to easily and quickly address potential billing disputes, EBI may provide the End-User or a regulatory agency on request: o The name, address, phone number and fax number of the Client. o The nature of any charge o The method of authorization. o Information as to how an End-User may cancel a service or product. In conjunction with the Agreement EBI, or Client, will provide: o A toll-free customer service number. o Dedicated staff to respond to End-Users inquiries. o Full and timely investigation of any written dispute. o A credit or response to the End-User within 30 days of the End-User's dispute. 7. DISCLOSURE Client hereby agrees that EBI may share the following with federal and state enforcement agencies: o Identifying information with respect to terminated billing for Client programs or services. o A description of specific problems relating to "Slamming" or "Cramming" that EBI has encountered, and the steps taken to correct such problems. o Summary and detailed data with regard to End-User complaints, inquiries and Adjustments. 8. REIMBURSEMENT TO EBI Client acknowledges and agrees to fully reimburse EBI, within ten (10) days, any fines or penalties charged EBI by Telcos and/or State/Federal agencies pursuant to Client's Billing Transactions billed by EBI. (These guidelines may be amended from time-to-time by EBI providing thirty (30) days prior written notice.) National Online Services Master Services Agreement SCHEDULE II - PhoneBill SERVICES (TELCO BILLING) This Service Order for PhoneBill Services ("Service Order") shall be effective as of (the "Order Date"). This Service Order may be terminated by either party, as of the end of the then current Term of the Agreement, by providing written notice to the other party at least 90 days prior to the end of such current Term. Otherwise, this Service Order shall remain in full force and effect until termination of the Agreement. 1. SERVICE ORDER SUMMARY. This Service Order shall generally include: i) submission of Client's valid Billing Transactions to Telcos for billing and collection, ii) processing of Unbillables, Adjustments and Uncollectables as such terms are defined herein, iii) database administration to support End-User Inquiry, iv) reconciliation and settlement of amounts due to Client with respect to the Billing Transactions, and v) standard reporting and tracking for each Account established by Client. 2. ORDERING INITIATION. This Service Order may be initiated by Client, by providing 90 days prior written notice to EBI together with any applicable setup Fee as set forth on Exhibit B to the Agreement. 3. TELCO SUBMISSION UNBILLABLES. EBI shall submit to the Telcos those Billing Transactions of Client that have passed the EBI Edit Process and represent Client Services that have been pre-approved by EBI and/or the Telcos where applicable. Telcos may subject Client's Billing Transactions, submitted to it by EBI, to its own edit process and either be unable or unwilling to bill certain transactions (each an "Unbillable") even though such Unbillable transactions passed the EBI edit process. Unbillables returned to EBI in an electronic format by the Telco will be returned to Client in a similar format. EBI shall have no further responsibility for such Unbillable transactions except, however, if Billing Transactions are deemed Unbillable due to EBI's error or omission, EBI shall correct and resubmit such Billing Transactions at no additional charge to Client. Unbillables shall be applied to the settlement of amounts due Client in accordance with the methodology set forth on Exhibit II-B attached hereto. National Online Services Master Services Agreement 4. INQUIRY SUPPORT ADJUSTMENTS. EBI and Client have executed a separate service order to cover End-User Inquiry, which is attached to the Agreement as Schedule VI. As a result of End-User Inquiry services or otherwise as initiated by either a Telco or Client, EBI shall process Adjustments, as such term is defined on Exhibit A to the Agreement, and incorporate the amount of such Adjustments into the settlement of amounts due to Client. Adjustments initiated by a Telco and reported to EBI shall be applied to Client in accordance with the methodology set forth on Exhibit II-B attached hereto. 5. HOLDBACK TRUE-UP, UNCOLLECTABLES. Telcos may withhold, from the gross deposited dollars, a reserve amount to cover anticipated write-offs of uncollectable End-User accounts ("Uncollectables"), which may be realized some time in the future. EBI shall withhold a similar amount from funds otherwise due to Client (the "Telco Holdback") in order to cover amounts withheld by Telcos: The Telco Holdback rate shall be initially set at five percent (5%) of the gross value of Client's Billing Transactions. The Telco Holdback rate may be modified from time to time by EBI based on a reasonable analysis of Client's Billing Transactions. From time to time, Telcos will conduct a reconciliation of the amounts held back compared to actual Uncollectables realized for a particular period (a "TELCO TRUE-UP") and may subsequently revise their reserve rates as well as collect from or refund to EBI any difference between the amounts withheld by such Telcos and the actual Uncollectables. After a Telco performs its Telco True-Up and reports the results to EBI, EBI will similarly reconcile the Telco Holdback amount with the realized Uncollectables pursuant to the methodology contained in Exhibit II-B (each such reconciliation a "True-Up"). EBI shall include the results of such True-Ups on a summary report to Client. True-Up results reflected on the summary report shall be incorporated into the settlement of amounts due to Client, as further described in Section 7, hereunder. National Online Services Master Services Agreement 6. OTHER DEDUCTIONS. a) Telco Fees. EBI shall be entitled to recover from or pass- through to Client, all Telco-imposed processing and other charges associated with Client's Billing Transactions ("Telco Fees"). The Telco Fees are set forth on Exhibit II-D hereto. b) EBI Reserve. EBI may withhold, from any amounts otherwise due to Client, an amount necessary to fund the EBI Reserve. The EBI Reserve rate for each Account under this Agreement will initially be established at five percent (5%) of gross value of Client's Billing Transactions. EBI may, in its reasonable discretion, adjust the EBI Reserve requirement for any Account. Such adjustment may be accomplished by either: (i) adjusting the previously established reserve percentage for such Account; (ii) adjusting or offsetting the EBI Reserve for another Account; (iii) invoicing Client directly for additional amounts required; or (iv) reimbursing Client for excess amounts, if applicable. With respect to Client's Billing Transactions, certain Telco's may require a reserve for Unbillables and/or Adjustments exceeding certain thresholds. This requirement may necessitate an increase in the EBI Reserve. If applicable, this increase shall be based on Client's actual Unbillable and/or Adjustment experience over a three (3) month period for the subject Telcos. The adequacy of this component of the EBI Reserve shall be reviewed on a quarterly basis and determined based on Client's actual experience of Unbillables and/or Adjustments in the prior quarter for the relevant Telcos. 7. SETTLEMENT OF AMOUNTS DUE. Client shall be entitled to the gross value of the Billing Transactions remitted to the Telcos less any applicable Unbillables, Adjustments, Telco Holdback, excess Uncollectables (pursuant to any True-ups), Fees, Telco Fees and EBI Reserves (the difference being the "Net Proceeds"). Each week EBI shall transfer, by wire to Client's designated bank account, the Net Proceeds identified the prior week. It shall be Client's responsibility to provide EBI with complete and accurate written wire transfer instructions. In addition to the Net Proceeds, Client shall be entitled to any excess Telco Holdback from prior period True-ups and any excess EBI Reserve as set forth below: (a) Periodic EBI Reserve Remittance. No later than thirteen (13) months from the end of a given Deposit Month ("Roll-Down Month"), EBI shall apply fifty percent (50%) of the Roll-Down Month's EBI Reserve, by Account Number, to Client's Account. At the eighteenth (18th) month from the close of a Roll-Down Month, EBI shall apply the balance of the Roll-Down Month's EBI Reserve, by Account Number, to Client's Account. National Online Services Master Services Agreement 8. REPORTS. (a) Standard Reporting. EBI agrees to provide Client with EBI's standard reports identified in Exhibit II-C attached hereto and incorporated herein. Client, may request that EBI provide additional reports or a different formatted report. To the extent EBI can comply with such request with reasonable effort, EBI shall supply such reports at an additional charge based upon the time and expense to be mutually agreed upon by the parties. (b) Report Review. Client agrees that it is solely responsible for inspecting and reviewing all reports provided by EBI within sixty (60) days of receipt by Client. Client's failure to report any errors or inconsistencies with respect to such reports within such timeframe shall constitute acceptance by Client. (c) Report Detail. Client acknowledges and agrees that (i) the individual Telcos may not always provide definitive detail to EBI for amounts the Telco deems to be Unbillables, Adjustments, or Uncollectables, (ii) EBI shall not be held to a higher standard of accounting pertaining to Telco performance as that provided by the individual Telco, and (iii) EBI's methodology contained in Exhibit II-B associated with the determination of Client's share of Unbillables, Adjustments or Uncollectables is reasonable and appropriate given the detail received from the individual Telco. (d) Audit. Upon 30 days prior written notice by Client, but no more frequently than once during a twelve (12) month period, Client shall have access to EBI's records pertaining to Client's Billing Transactions, including, but not limited to, the information EBI receives from Telcos. The audits conducted hereunder shall be at Client's sole cost and expense provided, however, if an audit reveals that amounts due to Client were understated by more than 10% for the period audited, then EBI shall, in addition to promptly paying to Client the understated amount, reimburse Client for all reasonable out-of-pocket audit costs. Notwithstanding any of the foregoing, Client shall have no right to audit any EBI records pertaining to periods more than twelve (12) months prior to the date of notice of such audit. National Online Services Master Services Agreement 9. BILLING APPEARANCE. Where a Telco provides the capability, Clients Billing Transaction shall appear on such Telco's subscriber bills within EBI's billing page, under the name designated by Client for each Account Number. 10. TELCO CONFIDENTIALITY. Client hereby acknowledges and agrees that, without express authorization from a Telco, Client shall not publish or use the name, service mark or trademark of any Telco in its advertising, telemarketing, direct mail or other promotions or make any misrepresentations concerning an affiliation with any Telco with regard to the Billing Transactions or Client's Services. In the event of a violation of this section, Client shall pay to EBI, as liquidated damages, for loss of reputation and business good will, and not as a penalty, $10,000 for each such violation. IN WITNESS WHEREOF, the parties hereto have executed this Service Order as of the Order Date set forth above. eBillit, Inc. (EBI) National Online Services, Inc. (Client) By: By: Name: Name: Title: Title: National Online Services Master Services Agreement EXHIBIT "II-A" Telco Billing Contracts Ameritech - Ohio Bell NYNEX - New England Tel - Michigan Bell - New York Tel - Indiana Bell - Wisconsin Bell Pacific Bell - Pacific Bell - Illinois Bell - Nevada Bell Bell Atlantic - New Jersey Tel Southwestern Bell - Bell PA - Diamond State U.S. West - Northwest Bell - C&P DC - Mountain Bell - C&P MD - Pac NW Bell - C&P VA - C&P WVA Alltel Bell South Cincinnati Bell GTE - GTE North Illuminet - GTE Florida - GTE South NECA - GTE South West - GTE California SNET - GTE West - GTE North West Sprint United - United Florida - GTE Hawaii - CT&T - United Indiana GTE Contel - GTE North Contel - United Midwest - GTE South Contel - GTE S-W Contel Telecom Canada Citizens Telephone
All programs are subject to initial and continuing Telco approval and can be terminated at any time. Additional Telcos may be available for service, subject to Telco approval, upon EBI review and recommendation. The above information is generally current at the time of printing and is to be used for informative purposes only. The information contained in this Exhibit is subject to change without notice. Inclusion in the above list does not indicate or imply that the named Telcos approve the program(s) contemplated under this Agreement. EBI makes no promise or guarantee that this information is constant, permanent, all inclusive and/or final. National Online Services Master Services Agreement EXHIBIT "II-B" Telco Returns Matching Process & Allocation Methodology Rejects: Full Key: Bill To Number (BTN) Originating Number Terminating Number Call Date Call Time (Seconds excluded) Call Duration (Seconds excluded) A reject call record that matches a history record based on the above Full Key is considered an exact match and is returned to the Client with the EBI return code in position 70-71. Unbillables: Full Key: Bill To Number (BTN) Originating Number Terminating Number Call Date Call Time (seconds excluded) Call Duration (seconds excluded) An unbillable call record that matches a history record based on the above Full Key is considered matched and is returned to the Client with the EBI return code in position 70-71. If the total matched data is less than the unbillable amount charged by the Telco, a non-specific allocation is applied to the shortfall. The non-specific allocation methodology is based on each Client's specific unbillable experience compared to the total specific unbillable amount for each particular Telco. Adjustments 4501XX: Pass # 1-Full Key: Bill To Number (BTN) Originating Number Terminating Number Call Date Call Time (seconds excluded) Call Duration (seconds excluded) An adjustment call record that matches a history record based on the above Full Key is considered matched and is returned to the Client with the original call record that it matched. Pass # 2-Partial Key: Bill To Number (BTN) - Optional\Required Originating Number - Optional\Required Terminating Number - Optional Call Date - Optional Call Time - Optional Call Duration - Optional National Online Services Master Services Agreement AMENDMENT NUMBER ONE TO THE MASTER SERVICES AGREEMENT ("Agreement") BETWEEN eBillit, Inc. ("EBI") AND National Online Services, Inc. ("Client") DATED March 30, 2001 WHEREAS, Client has requested of EBI, and EBI is willing to grant to Client, a security interest in EBI relating to Client's right to Net Proceeds from its Billing Transactions. NOW, THEREFORE, the parties agree as follows: 1. All capitalized terms not defined herein shall have the meaning ascribed to them under the Agreement. 2. Section 21 is hereby added to the Agreement to read as follows: "21. SECURITY INTEREST. EBI hereby grants to Client a security interest in all of EBI's right, title and interest in and to, whether now owned or hereafter acquired, the following (hereafter the "Collateral"): all amounts collected or to be collected by EBI for Client under this Agreement pursuant to Billing Contracts, whether such rights to payment or collection constitute accounts, contract rights, instruments, general intangibles, chattel paper, or otherwise, after payment of all amounts which are or become due to or may be retained or held by any Telco or EBI under this Agreement, any Billing Contract or otherwise including, but not limited to, Fees, Telco Fees, Taxes, EBI Reserves, Telco Holdback, True-up, Unbillables, Uncollectables and Adjustments. EBI shall cooperate in taking such actions as are reasonably necessary to perfect Client's security interest in the Collateral, including, but not limited to, the filing of a UCC-1 financing statement." 3. All other terms and conditions of the Agreement shall remain in full force and effect. IN WITNESS WHEREOF, the parties have executed this amendment to the Agreement to be effective as of the date set forth above. eBillit, Inc. National Online Services, Inc. BY: BY: NAME: NAME: TITLE: TITLE: DATE: DATE: Amendment of MSA - EBI - CONFIDENTIAL - Page 1 of 1 EXHIBIT "II-B" Telco Returns Matching Process & Allocation Methodology An adjustment call record that matches a history record based on matching a minimum of four (4) keys, which must include one (1) of the Optional\Required keys in the above Partial Key, is considered matched and is returned to the Client with the original call record that it matched. The adjustment amount may not be greater than the history record amount. Pass # 3-Matrix Key: Bill To Number (BTN) - Optional/Required Originating Number - Optional/Required Terminating Number - Optional/Required Call Date - Optional Call Time - Optional Call Duration - Optional An adjustment call record that matches a history record based on matching a minimum of four (4) keys, which must include one (1) of the Optional/Required keys in the above Matrix Key is considered matched and is returned to the Client with the original call record that it matched. The adjustment amount may not be greater than the history record amount. All BTN'S contained in Telco Returns are compared to a BTN split table to determine if the BTN was involved in an area code split. If the BTN was involved in an area code split, the previous & current NPA is utilized in the matching process. All adjustment call records that fail the Full, Partial or Matrix Key matching process are combined with the 4550XX adjustment records and are matched utilizing the Bulk Match process. Adjustments 4550XX: Bulk Match Key: Bill To Number (BTN) Call Date CIC Bulk logic is a one-to-many matching process and utilizes the call date to determine the calls eligible for matching. All call dates equal or older than the Telco tape date are considered eligible. Matching is conducted in LIFO order up to the value of the adjustment call record. Matched call records are eliminated from the eligible pool after they have been adjusted to their original value. This elimination is based on the process run date regardless of the number of files (tapes) being processed for a given Telco within a particular run. An adjustment call record that matches a history record based on Bulk Match logic is returned to the Client with the original call record or records that it matched. Because the Bulk Match logic will allow matching to many records, it also allows matching to one or more Clients. Therefore, the returned 4550XX adjustment record may be included in more than one Clients return detail information. If the total combined matched data is less than the adjustment amount charged by the Telco, a non-specific allocation is applied to the shortfall. The non-specific allocation methodology is based on each Client's specific adjustment percentage in comparison to the total specific adjustment. National Online Services Master Services Agreement E01-2314 EXHIBIT "II-B" Telco Returns Matching Process & Allocation Methodology If the Telco fails to provide data for the End-User adjustments, and therefore no matching can be performed for that particular Telco, EBI will utilize the following methodology to allocate the adjustment amount reflected on the Telco PAR statement. The non-specific allocation methodology is based on the understanding that when a Telco reports End-User adjustments on the PAR statement, those adjustments are generally related to billings from both the PAR month and the month prior to the PAR month. Therefore, EBI uses each Client's billing activity for these two months, coupled with an historical adjustment percentage for each Client, as the basis for the allocation of the non-specific adjustments. For instance, if the Telco reports End-User adjustments on the October PAR statement, EBI would use June, July and August to derive an historical adjustment experience percentage by Client. This would result in a basis for allocation applied to September and October billing which would generate the non-specific allocation percentage for each Client that is utilized in the reconciliation of the October PAR. To determine the non-specific adjustment allocation percentage for each Client, EBI performs the following steps: Step 1 - Identify all Clients that deposit to that particular Telco for the given two-month period. Step 2 - Determine the actual billings deposited for each Client to that particular Telco as the basis for allocation. Step 3 - For all Clients identified in Step 2, determine the historical adjustment percentage. This percentage is based on the Telcos that have provided each Client with a 50% or higher of detailed adjustments. Step 4 - Multiply the actual billings amount in Step 2 by the historical adjustment percentage in Step 3 for each Client. Step 5 - Determine each Client's percentage of the sum total of the Step 4 calculation. Step 6 - Allocate the non-specific adjustment for that particular Telco based on the weighted percentages determined in Step 5. For example, XYZ Telco has applied $50,000 adjustment amount to the PAR without supporting data. The Clients who deposited in XYZ Telco would receive allocation in the following manner. EXHIBIT "II-B" Telco Returns Matching Process & Allocation Methodology
- ----------------------------------------------------------------------------------------------------------- Step 1 Step 2 X Step 3 = Step 4 Step 5 Step 6 - ----------------------------------------------------------------------------------------------------------- Client # Billings X Historical = Step 2 x Each Client $ Allocated Deposited Adjust % Step 3 contribution in (% in Step With XYZ Telco >50% relation to total 5 x Telco for supporting in Step 4 (% of $50,000) Sept & detail for $123,200) October June, July & August - ----------------------------------------------------------------------------------------------------------- 444 $ 55,000 X 10% = $ 5,500 4.46% $ 2,230 - ----------------------------------------------------------------------------------------------------------- 222 $160,000 X 15% = $ 24,000 19.48% $ 9,740 - ----------------------------------------------------------------------------------------------------------- 333 $ 35,000 X 22% = $ 7,700 6.25% $ 3,125 - ----------------------------------------------------------------------------------------------------------- 445 $220,000 X 35% = $ 77,000 62.5% $31,250 - ----------------------------------------------------------------------------------------------------------- 555 $300,000 X 3% = $ 9,000 7.31% $ 3,655 - ----------------------------------------------------------------------------------------------------------- $123,200 100.00% $50,000 ------------------------------------------------
Uncollectables 4601XX & 4650XX (Used for True-Ups): Write-Off Match Logic: Bill To Number (BTN) Call Date CIC Uncollectable write-off Logic is a one-to-many matching process and utilizes the write-off date to determine the calls eligible for matching. All call dates equal or older than the write-off record date are considered eligible. Matching is conducted in "last-in-first-out" order up to the value of the write-off record. Matched call records are eliminated from the eligible pool after they have been adjusted to their original value. This elimination is based on the process run date regardless of the number of files (tapes) being processed for a given Telco for a particular run. A write-off record that matches a history record based on write-off logic is returned to the Client with the BTN, write-off date and matched amount. The total of all matched write-offs is referred to as the "Specific Write-Off". If the total of all Client's Specific Write-Offs is less than the write-off amount charged by the Telco, a "NonSpecific Write-Off" is applied to each Client for the shortfall. The Non-Specific Write-off is based on each Client's Specific Write-Off in comparison to the total of all Specific Write-offs. For example, if a Client's Specific Write-off is 10% of the total of all Specific Write-0ffs, then they will be allocated a Non-Specific Writer-Off of 10% of the aforementioned shortfall. The Client's Specific Write-Off and Non-Specific Write-Off together make up the Client's "Write-Off Allocation" for a particular True-Up. If the Telco fails to provide adequate data for the write-off matching and, therefore, no matching can be performed for that particular Telco, EBI will utilize the following methodology to determine the Write-Off Allocation, used to apply the write-off amount reflected on the Telco PAR statement. This non-specific write-off allocation methodology is based on each Client's experience of detailed write-offs over a 12 month period, for Telcos that do provide write-off detail, coupled with each Client's billing activity for the three months prior to the Telco write-off date. EXHIBIT "II-B" Telco Returns Matching Process & Allocation Methodology To determine the non-specific write-off allocation percentage for each Client, EBI performs the following steps: Step 1 - Identify all Clients that deposited to that particular Telco for the applicable months. Step 2 - Identify each Client's deposited dollars to that particular Telco for the applicable months. Step 3 - For all Clients identified in Step 1, determine each Client's historical write-off percentage based on the various Telcos that have provided each Client with 50% or greater of actual write-off detail over a 12 month period. Step 4 - Multiply the deposit amount in Step 2 by the write-off percentage in Step 3 for each Client. Step 5 - Determine each Client's percentage of the sum total of the Step 4 calculation. Step 6 - Allocate the non-specific write-off amount for the Telco based on the weighted percentages determined in Step 5. For example, XYZ Telco has applied $50,000 write-off amount to the PAR statement without supporting detail. The Clients who deposited in XYZ Telco for this time period would receive allocation of the $50,000 in the following manner:
- ----------------------------------------------------------------------------------------------------------- Step 1 Step 2 X Step 3 = Step 4 Step 5 Step 6 - ----------------------------------------------------------------------------------------------------------- Client # Actual X Historical = Step 2 x Each Clients' $ Allocated Billing Write-Off % Step 3 contribution in (% in Step Deposited with Telco relation to total 5 x in XYZ > 50% in Step 4 (% of $50,000) Telco supporting 123,200) detail - ----------------------------------------------------------------------------------------------------------- 111 $ 55.000 X 10% = $ 5,500 4.46% $ 2,230 222 $160,000 X 15% = $ 24,000 19.48% $ 9,740 333 $ 35,000 X 22% = $ 7,700 6.25% $ 3,125 444 $220,000 X 35% = $ 77,000 62.5% $31,250 555 $300,000 X 3% = $ 9,000 7.31% $ 3,655 ---------------------------------------- $123,200 100.00 $50,000 ----------------------------------------
True-Up Procedure: Once Clients Write-Off Allocation has been determined, it is compared to the Telco Holdback reserved for the period being trued-up, and the difference, if any, is reported on a True-Up Summary report. A positive difference (i.e. Telco Holdback was greater than the Write-Off Allocation) will be remitted to Client, while a negative difference (i.e. Telco Holdback was less than the Write-Off Allocation) will be paid by Client. EXHIBIT "II-C" Delivery schedule of Reports & Data Files The following reports and data files are available on the BBS:
Report/Data File Day Available - ---------------- ------------- Confirmation Report Same day as data is submitted to EBI Call Acceptance Transmittal Report Friday 12:00 PST Call Acceptance Transmittal Data File Friday 12:00 PST Edit Reject Reports Friday 12:00 PST Edit Reject Data File Friday 12:00 PST EBI Inquiry Services Reports Monday EBI Inquiry Services Data Files Monday EBI Cancellation Request Data Files Monday thru Friday (if applicable) Telco Unbillable Reports Thursday Telco Unbillable Data Files Thursday Telco Adjustment Reports Thursday Telco Adjustment Data Files Thursday Credit Unbill Data File Thursday Telco Uncollectable Reports Friday Telco Uncollectable Data Files Friday Settlement Statement Report Wednesday After 5:00 PST Settlement Status Report Wednesday After 5:00 PST Payment Summary Report Wednesday After 5:00 PST Payment Summary Data File Wednesday After 5:00 PST Payment Unbill Report Wednesday After 5:00 PST Payment Unbill Data File Wednesday After 5:00 PST Payment Recourse\Holdback Report Wednesday After 5:00 PST Payment Recourse\Holdback Data File Wednesday After 5:00 PST True-Up Summary Reports Wednesday After 5:00 PST The following reports are available on the "NetImpact" web directory Settlement Statement Report Wednesday After 5:00 PST Settlement Status Report Wednesday After 5:00 PST Payment Summary Report Wednesday After 5:00 PST Payment Summary Excel Spreadsheet Wednesday After 5:00 PST Payment Unbill Report Wednesday After 5:00 PST Payment Unbill Excel Spreadsheet Wednesday After 5:00 PST Payment Recourse\Holdback Report Wednesday After 5:00 PST Payment Recourse\Holdback Excel Spreadsheet Wednesday After 5:00 PST True-Up Summary Reports Wednesday After 5:00 PST Telco Returns Detail Listing Spreadsheet Wednesday After 5:00 PST
Exhibit Revised 01/00 EXHIBIT "II-D" Telco Fees
Telco Group SID Telco Name Bill Render Interstate Intrastate Bulk 4250 SSM 010118 Pay/Call 010116 End-User Per Msg. Per Msg. Per Msg. Per Msg. Per Msg. Adjust Ameritech 9321 Ohio Bell 0.440 0.050 0.050 0.100 0.100 0.100 9.00 9323 Michigan Bell 0.440 0.050 0.050 0.100 0.100 0.100 9.00 9325 Indiana Bell 0.440 0.050 0.050 0.100 0.100 0.100 9.00 9327 Wisconsin Bell 0.440 0.050 0.050 0.100 0.100 0.100 9.00 9329 Illinois Bell 0.440 0.050 0.050 0.100 0.100 0.100 9.00 Bell Atlantic 9102 New Eng Tel 0.950 0.020 0.020 0.150 0.020 0.050 5.00 9104 New York Tel 0.950 0.020 0.020 0.150 0.020 0.050 5.00 9200 New Jersey Tel 0.950 0.020 0.020 0.150 0.020 0.050 5.00 9208 Bell Penn. 0.950 0.020 0.020 0.150 0.020 0.050 5.00 9210 Diamond State 0.950 0.020 0.020 0.150 0.020 0.050 5.00 9211 C&P DC 0.950 0.020 0.020 0.150 0.020 0.050 5.00 9212 C&P MD 0.950 0.020 0.020 0.150 0.020 0.050 5.00 9213 C&P VA 0.950 0.020 0.020 0.150 0.020 0.050 5.00 9214 C&P WVA 0.950 0.020 0.020 0.150 0.020 0.050 5.00 Bell South 9417 Bell South 0.505 0.055 0.061 .095+2.5% 0.060 .111+2.5% 6.40 Companies 169 GTE North 0.433 0.045 0.076 0.135 0.135 0.073 15.00 328 GTE Florida 0.433 0.045 0.076 0.135 0.135 0.073 15.00 479 GTE South 0.433 0.045 0.076 0.135 0.135 0.073 15.00 2080 GTE S-West 0.433 0.045 0.076 0.135 0.135 0.073 15.00 2319 GTE California 0.433 0.045 0.076 0.135 0.135 0.073 15.00 2320 GTE West 0.433 0.045 0.076 0.135 0.135 0.073 15.00 2416 GTE N-West 0.433 0.045 0.076 0.135 0.135 0.073 15.00 3100 GTE Hawaii 0.433 0.045 0.076 0.135 0.135 0.073 15.00 GTE N-Contel 170 GTE N-Contel 0.433 0.045 0.076 0.135 0.135 0.073 15.00 480 GTE S-Cortel 0.433 0.045 0.076 0.135 0.135 0.073 15.00 2081 GTE SW Contel 0.433 0.045 0.076 0.135 0.135 0.073 15.00 Citizens Tel 2308 Citizens Tel 0.820 0.080 0.080 0.080 0.080 0.080 10.00 Pacific Bell 9740 Pacific Bell 0.350 0.030 0.030 0.030 0.030 0.280 9.00 Nevada Bell 9742 Nevada Bell 0.550 0.030 0.091 0.030 0.030 0.280 4.00 Bell 9533 S-West Bell 0.400 0.031 0.031 0.280 0.090 0.250 9.03 S. West 9631 North West Bell 0.850 0.000 0.000 0.000 0.000 0.000 2.50 9636 Mountain Bell 0.850 0.000 0.000 0.000 0.000 0.000 2.50 9638 PAC N-W Bell 0.850 0.000 0.000 0.000 0.000 0.000 2.50 Alltel 9995 Alltel 0.650 8.5% 8.5% 8.5% 8.5% 9.0% 0.00 Cincinnati Bell 348 Cincinnati Bell 0.600 0.022 0.022 0.052 0.022 0.022 15.00 Illuminet 9999 Illuminet 0.000 0.800 0.800 0.800 0.800 0.800 0.00 NECA 9996 NECA 0.000 0.550 0.550 0.550 0.550 0.550 0.00 SNET 9147 SNET 0.510 0.110 0.110 0.110 0.110 0.110 0.00 United 341 United Florida 0.390 0.190 0.190 0.190 0.190 0.190 2.00 470 Carolina T&T 0.390 0.190 0.190 0.190 0.190 0.190 2.00 832 United Indiana 0.390 0.190 0.190 0.190 0.190 0.190 2.00 9993 United Midwest 0.390 0.190 0.190 0.190 0.190 0.190 2.00 Canada 8050 Telcom Canada 0.000 0.560 0.560 0.560 0.560 0.560 0.00
The above information is current at the time of printing and is to be used for informative purposes only. The information contained in this exhibit is subject to change without [illegible] IGT makes no guarantee that this information is constant, permanent, all inclusive and/or final. Note: US West End-User Adjustment Fee is based on each line item adjusted Exhibit "II-E" Payment Instructions Until receipt of a subsequent written notice executed by the undersigned Customer, PAYMENTONE is hereby instructed to remit any Net Proceeds to which the Customer is entitled under this Agreement to the account listed below. These wire instructions may only be modified or revoked by a written notice signed by Customer. Customer agrees to indemnify and hold PAYMENTONE harmless from any and all claims or expenses arising, directly or indirectly, from PAYMENTONE complying with the instructions contained herein. Wire Transfer Designation for Direct Bill ID 696 Company EPIXTAR COMMUNICATIONS CORP. ---------------------------------------------------------- Address 11900 Biscayne Blvd. 3rd Floor ---------------------------------------------------------- Miami, FL 33181 ---------------------------------------------------------- ---------------------------------------------------------- Bank Name Wachovia Bank ---------------------------------------------------------- Bank Address 4299 NW 36th Street ---------------------------------------------------------- Miami, FL 33166 ---------------------------------------------------------- ---------------------------------------------------------- Account Name Epixtar Comm. ---------------------------------------------------------- Account Number 2000014597992 ---------------------------------------------------------- Bank (ABA) Transfer Number 06000021 ---------------------------------------------------------- Signature: ________________________ Print name: ___________________________ Title: ____________________________ Date: _________________________________ SCHEDULE VI - END-USER INQUIRY This Service Order for End-User Inquiry ("Service Order") shall be effective as of ________________ ("Order Date") and shall remain in full force and effect as long as there is in effect a valid service order for either PhoneBill or DirectBill services. 1. SERVICE ORDER SUMMARY. This Service Order shall generally include: i) Referral or transfer of End-User inquiries to Client, ii) Handling by EBI of End-User Inquiries under certain circumstances in accordance with Inquiry Guidelines and Inquiry Standards, each as defined herein. 2. ORDERING, INITIATION. This Service Order shall be initiated by Client automatically by providing 90 days prior written notice to EBI of a service order for either PhoneBill or DirectBill services, together with any applicable setup Fee(s) as set forth on Exhibit B to the Agreement. 3. CLIENT-HANDLED INQUIRIES. Client may elect, by written notice to EBI, to provide its own End-User Inquiry support provided, however, that Client can continually meet the performance requirements set forth on Exhibit VI-A (the "Inquiry Standards"), attached hereto. EBI shall refer or transfer End-User Inquiries to Client based on mutually agreeable procedures. EBI reserves the right to monitor Client's performance of its own End-User inquiry. If in EBI's reasonable discretion, EBI determines that Client's End-User Inquiry support is unsatisfactory, EBI may elect to provide End-User Inquiry support immediately upon written notice to Client. In the event Client has ordered Telco Billing from EBI, Client acknowledges that the Telcos reserve the right to handle certain End-User Inquiries. 4. EBI-HANDLED INQUIRIES. In the event Client has not elected to handle End-User Inquiries or if otherwise Client has been unable to meet the performance requirements set forth above, then EBI shall handle End-User Inquiries in accordance with its standard procedures or otherwise as mutually agreed to by the parties (the "Inquiry Guidelines"). Client agrees to cooperate with EBI with respect to End-User Inquiries including, without limitation, providing originating numbers, locations, applicable rate tables, and detailed written and/or electronic End-User authorizations, such as letters of agency, as requested by EBI. EBI and Client shall establish a contact within each organization for the purpose of resolving End-User Inquiries. When subscription authorization is required, Client shall provide EBI with a toll-free number and/or a data file to access End-User subscription information. (a) Adjustments. EBI shall use reasonable efforts to sustain billing charges in accordance with the Inquiry Guidelines. However, EBI shall not be required hereunder to commence any litigation or take any other form of action to enforce collection of bills rendered to End-Users except as expressly provided in an applicable service order between the parties. (b) Regulatory Complaints. EBI shall respond to any regulatory complaints made by End-Users and forwarded to EBI by a regulatory agency and shall provide a copy of such response to Client upon request. IN WITNESS WHEREOF, the parties hereto have executed this Service Order as of the Order Date set forth above. eBillit, Inc. (EBI) National Online Services, Inc. (Client) By: /s/ Joe Lynam By: /s/ William D. Rhodes, Jr. ----------------------------- ------------------------------- Name: Joe Lynam Name: William D. Rhodes, Jr. --------------------------- ----------------------------- Title: CEO Title: President -------------------------- ---------------------------- EXHIBIT "VI-A" Inquiry Standards End-User Inquiry shall be performed by Client or EBI (each in this context a "Provider") in accordance with the following Inquiry Standards: 1. Provider shall maintain a toll-free telephone number through which End-User's initiate inquiries. Where practical, such number shall be prominently displayed on the End-User's bill. 2. Provider shall answer 80% of all End-User Inquiries, with a live Client service agent, within 90 seconds. 3. Provider shall have adequate Client service staff available to support End-User Inquiries between the hours of 8:00 am and 5:00 pm for all time zones where End-Users reside. 4. Provider shall not allow calls to be routed to a voicemail function during required service hours (live agent must answer all calls). 5. Provider shall maintain a call abandon rate less than or equal to 5% of inbound calls. 6. Provider shall respond to written End-User Inquiries, in writing, within 15 days of receipt. [Check from National On Line Services, Inc. made out to eBillit, Inc., dated March 29, 2001, in the amount of Five Thousand Dollars and no cents] EX-10.8.1 11 b331272_ex108-1.txt AMENDMENT TO MASTER SERVICE AGREEMENT Exhibit 10.8.1 AMENDMENT NUMBER THREE to the MASTER SERVICES AGREEMENT ("Agreement"), as amended, between Payment One Corporation (f.k.a. eBillit, Inc.)("PAY1") and and National Online Services Inc. ("Client") dated March 30, 2001 WHEREAS, Clients Billing Transactions have been the subject of LEC-reported End-User complaints, in some cases, exceeding LEC-imposed thresholds for such complaints; and WHEREAS, Client acknowledges that excessive End-User complaints increase PAY1's administrative costs as well as threaten PAY1's Billing Contracts with LECs and a loss or interruption of such Billing Contracts could result in irreparable harm to PAY1. NOW, THEREFORE, in consideration of the foregoing, the parties hereto agree, effective as of May 1, 2003 ("Amendment Date"), as follows: 1. All capitalized terms not defined herein shall have the meaning ascribed to them under the Agreement. 2. The "End-User Adjust" fee element of Exhibit II-D to the Agreement is hereby amended to be $50.00 per event (such events the "Chargeable LEC Inquiries") to a maximum of $150,000 per month. In the event that, for any two consecutive months, the total quantity of Chargeable LEC Inquiries exceeds 3,000, then, as liquidated damages and not as a penalty, Client shall pay an additional fee of $50,000. Notwithstanding the foregoing, if Client's Billing Transactions produce less than 1.3% Chargeable LEC inquiries (measured as current month events divided by prior month's unique BTNs) for two consecutive months, then the "End-User Adjust" fee element of Exhibit II-D shall be restored to the LEC pass-through rates effective with the month in which such goal is reached and for each month thereafter where such goal is maintained. 3. In the event that billing restrictions are Imposed on Client's Billing Transactions for any Account covered under the Agreement, including but not limited to, limitations on new record submission, recurring record submission or volume of records submitted, then the provisions of paragraph 2, above, will not apply during the period of such restriction for billing records that apply for the geographic/LEC region of the restriction. PaymentOne NOS Amend MSA 3 6-11-03 Rev B -CONFIDENTTAL - Page 1 of 2 4. All other terms and conditions of the Agreement shall remain in full force and effect. IN WITNESS WHEREOF, the parties have executed this amendment to the Agreement to be effective as of the date first set forth above. PaymentOne Corporation National Online Services, Inc. BY: __/s/__[ILLEGIBLE]______ BY: __/s/__[ILLEGIBLE]______ NAME: _____[ILLEGIBLE]______ NAME: _____[ILLEGIBLE]______ TITLE: _______CEO___________ TITLE: _____President_______ DATE: ______6-12-03_________ DATE: ______6-12-03_________ PaymentOne NOS Amend MSA 3 6-11-03 Rev B -CONFIDENTTAL - Page 2 of 2 AMENDMENT NUMBER TWO to the MASTER SERVICES AGREEMENT ("Agreement"), as amended, between PaymentOne Corporation (f.k.a. eBillit Inc.) ("EBI") and and National Online Services, Inc. ("Client") dated March 30, 2001 The parties hereto agree, effective as of December 1, 2002 ("Amendment Date"), as follows: 1. All capitalized terms not defined herein shall have the meaning ascribed to them under the Agreement. 2. Exhibit "B" to the Agreement is hereby amended by replacing it entirely with the attached Exhibit "B". 3. Section 2 of the Agreement is hereby amended to add Service Options for DirectBill Services, Credit Card Processing and Automated Clearing House (ACH), which are more fully described on the respective Schedules III, IV and V attached hereto together with applicable Exhibits thereto. 4. Four overlay documents (each an "Overlay") are attached to this Amendment Number Two to the Agreement, and each Overlay identifies an affiliate of Client and its authorized signatory. Each Overlay shall establish a Master Services Agreement between EBI and such affiliate, with terms and conditions identical to those agreed to by EBI and Client in the Agreement, as amended on October 1, 2002 and December 1, 2002. Each affiliate shall be responsible for its contractual obligations with respect to its individual Account only; however, the Client, National Online Services, Inc., shall bear overall responsibility for any aggregate minimum commitments hereunder. 4. This Agreement, as amended, shall terminate as of March 30, 2005 unless otherwise extended by mutual consent of the parties. All other terms and conditions of the Agreement shall remain in full force and effect. IN WITNESS WHEREOF, the parties have executed this amendment to the Agreement to be effective as of the date first set forth above. PaymentOne Corporation National Online Services, Inc. BY: /s/ Joe Lynn BY: /s/ William D. Rhodes, Jr. ------------------ -------------------------- NAME: Joe Lynn NAME: William D. Rhodes, Jr. ---------------- ------------------------ TITLE: CEO TITLE: President --------------- ----------------------- DATE: 12/9/02 DATE: 12/6/02 ---------------- ------------------------ Payment One - NOL Amend MSA 2. - Final.doc - CONFIDENTIAL - Page 1 of 17 EXHIBIT "B" Fees The following Fees shall apply: 1) Phone Bill Services (Telco Billing) a) Initial Account Setup Fee: (Paid in full) $5,000.00 one time - Additional Accounts (Waived for up to two Accounts) $1,500.00 each b) EBI Processing Fee for Monthly Recurring charges ("425001" records): Gross Dollars Deposited each Month times 3% c) EBI Processing Fee for 1+ toll charges ("01xx01" records): Billing Transactions Deposited Monthly Fee: Greater of: First 100,000 $0.0475 per Transaction or 1% of billed amount Next 200,000 $0.0425 per Transaction or 1% of billed amount Next 300,000 $0.0375 per Transaction or 1% of billed amount Next 400,000 $0.0325 per Transaction or 1% of billed amount All Remaining $0.0275 per Transaction or 1% of billed amount Note: The total EBI Processing Fee for each Deposit Month shall be the greater of: i) the fees calculated in parts b) and c), above; ii) $0.85 per unique monthly recurring charge; or iii) a minimum monthly fee based on the Deposit Months and amounts set forth in the following schedule: January 2003 and February, 2003 - $16,500/Mth March, 2003 and April, 2003 - $18,500/Mth May 2003 and June, 2003 - $20,500/Mth July, 2003 and thereafter - $22,500/Mth The minimum monthly fee, above shall cover the first six (6) Accounts established by Client to include the following affiliated entities: National Online Services, Inc., Liberty Online Services, Inc., AmeriLinc, Inc., SBA Online Inc., and Epixtar Communications Corp. Each additional Account shall require an additional $5,000 in minimum monthly fee commitment. 2) End-User Inquiry a) Oral End-User Inquiry $ 3.95 each b) Referral (live agent) $ 2.00 each c) Transferred or auto-referred $ 0.11 per minute d) Written End-User Inquiry $ 50.00 each e) Written regulatory complaints $ 150.00 each f) Adjustment record processing $ 0.50 each Payment One - NOL Amend MSA 2. - Final.doc - CONFIDENTIAL - Page 2 of 17 3) DirectBill Services (Client-Branded Billing) a) Initial Invoice Fee (per Invoice)* $ 1.89 each * Includes: 2-page invoice generation (printed front and back), rating, printing, postage, lock-box administration, posting of adjustments and payments, account maintenance, and settlement of funds. b) Additional Invoice Pages $ 0.19 each c) Minimum Monthly Invoicing Fees - Waived for first DirectBill Account, $5,000 per Account/month thereafter. d) Startup/Account Setup Fee (per Account) $15,000 one time e) Dunning Notices (optional) $ 0.80 each f) Custom Development (subject to Client approval) TBD 4) Credit Card Processing a) Application Fee (per Account) $ 100 one time b) Monthly Activity Fee: 0 to 25,000 monthly transactions $0.05 per transaction 25,001 to 75,000 monthly transactions $0.04 per transaction 75,001 to 150,000 monthly transactions $0.03 per transaction over 150,000 monthly transactions $0.02 per transaction (Minimum Monthly Activity Fee: $500) c) All Merchant Bank Fees Client responsible. 5) Automated Clearing House (ACH) a) Application Fee (per Account) $100 one time b) Monthly Activity Fee: 0 to 25,000 monthly transactions $0.05 per transaction 25,001 to 75,000 monthly transactions $0.04 per transaction 75,001 to 150,000 monthly transactions $0.03 per transaction over 150,000 monthly transactions $0.02 per transaction (Minimum Monthly Activity Fee: $500) c) Merchant Bank Fees $0.20 per transaction e) Real-time Validation: (i) Routing Number Check $0.03 per transaction (ii) STAR Network (per match) $0.30 per transaction Payment One - NOL Amend MSA 2. - Final.doc - CONFIDENTIAL - Page 3 of 17 f) Initial Return Fee $0.85 per transaction g) Dishonored Return Service $1.50 per transaction (in lieu of initial Return Fee) Payment One - NOL Amend MSA 2. - Final.doc - CONFIDENTIAL - Page 4 of 17 SCHEDULE III - Service Order for DirectBill SERVICES (CLIENT-BRANDED BILLING) This Service Order for DirectBill Services ("Service Order") shall be effective as of the Amendment Date. This Service Order may be terminated by either party, as of the end of the then current Term of the Agreement, by providing written notice to the other party at least 30 days prior to the end of such current Term. Otherwise, this Service Order shall remain in full force and effect until termination of the Agreement. 1. SERVICE ORDER SUMMARY. This Service Order shall generally include: i) the editing and formatting of Billing Transactions, which have been submitted by Client in a reasonably acceptable to EBI, ii) generation and distribution of End-User invoices, iii) setup and maintenance of End-User account information within the billing system, iv) processing and remittance of End-User payments, v) standard reporting for each Client Account, and vi) rating of Billing Transactions. In addition, Client may optionally include:, vii) adding informational inserts to invoices, and viii) sending of dunning notices for delinquent End-User accounts approximately 75 days after initial billing. 2. EBI PROCESSING. All Billing Transactions accepted by EBI pursuant to the EBI Edit Process, shall be made available for invoicing to End-Users, subject to the availability of billing name and address information ("BNA"). Client shall supply BNA for each End-User account. Billing Transactions that have BNA information available shall be invoiced to End-Users, together with any applicable Taxes, in accordance with mutually agreeable billing cycles. 3. INQUIRY SUPPORT. ADJUSTMENTS. EBI and Client have executed a separate service order to cover End-User Inquiry, which is attached to the Agreement as Schedule VI. As a result of End-User Inquiry services, or otherwise as initiated by Client, EBI shall process Adjustments and incorporate the amount of such Adjustments into the settlement of amounts due to Client. EBI shall provide Client with up to three (3) sign-on Ids with which Client can access End-User information within the DirectBill system. 4. REMITTANCE OF END-USER PAYMENTS TO EBI. EBI shall direct End-Users to remit all payments to EBI (the "Proceeds"), which EBI shall then deposit into an account with a federally insured financial institution. Client hereby grants and conveys to EBI the right to endorse and deposit any check, draft or other negotiable instrument received by EBI from an End-User. Any payments deposited by EBI and remitted to Client by EBI on which a check is thereafter returned by the financial institution as unpaid, shall be reported on a subsequent remittance advice as a negative amount. 5. REMITTAL OF CLIENT FUNDS. Client shall be entitled to those Proceeds that are remaining, if any, after deducting all Fees and other charges provided for hereunder (hereafter "Net Proceeds"). Net Proceeds will include any Taxes that were applied to, or included in, the amount of the Billing Transactions. EBI shall remit to Client each week the Net Proceeds collected the prior week. Subject to bank minimum wire size requirements, the transfer of any such funds shall be by wire transfer, based on the account information Payment One - NOL Amend MSA 2. - Final.doc - CONFIDENTIAL - Page 5 of 17 provided by Client. Remittances requiring manual transmittal may be via check sent by forty-eight (48) hour delivery service, where available, to the address designated in writing by Client. Client shall be responsible to provide EBI written notice of any change of wire instructions or address. 6. REPORTS. On a weekly basis, EBI shall provide Client, through EBI's web-based reporting system, a set of standard billing reports, which shall include i) a summary of each billing cycle including dollars, minutes, number of calls, and number of invoices sent during the prior week, ii) a summary of outstanding End-User account balances with past due aging, and iii) a summary of payments processed. Client may request in writing that EBI provide additional reports. To the extent that EBI can comply with such request in a reasonable manner, EBI shall supply such reports at an additional charge to the Client, which charge shall be determined solely by EBI based upon the time and expense EBI shall incur in generating such reports. Client agrees that it is solely responsible for inspecting and reviewing all reports provided by EBI within sixty (60) days of receipt by Client. Client's failure to report any errors or inconsistencies with respect to such reports shall constitute acceptance by Client. {- End of Schedule lll. Exhibits follow. Remainder of page intentionally left blank. -} Payment One - NOL Amend MSA 2. - Final.doc - CONFIDENTIAL - Page 6 of 17 SCHEDULE IV - Service Order for CREDIT CARD PROCESSING This Service Order for Credit Card Processing ("Service Order") shall be effective as of the Amendment Date. This Service Order may be terminated by either party by providing the other party with at least 30 days prior written notice. Otherwise, this Service Order shall remain in full force and effect until termination of the Agreement. 1. SERVICE ORDER SUMMARY. This Service Order generally includes the provisioning of certain computerized capabilities to assist Client in the administration and processing of commercial credit card transactions for End-User's that select such method in payment for Client's Services, subject to Client maintaining a valid, ongoing merchant account with a participating financial institution. 2. Interface and Validation. a) EBI shall utilize its real-time server platform designed to capture End-Users' credit card billing information (hereafter the "Payment API"). Client and EBI shall establish an effective link from Client's online order-entry screen to EBI's Payment API. b) For each unique End-User entry made into the Payment API, EBI shall initiate a validation event through its links to credit card industry databases, for the purpose of obtaining an authorization code, indicating acceptance (or rejection) of the transaction by the underlying financial institution. EBI shall promptly notify Client of the results of such authorization together with the information originally delivered to the Payment API by Client. c) All authorization and billing events shall be submitted by EBI using Client's established merchant account, which account shall be provided by Client to EBI in writing. d) EBI shall store all relevant End-User billing information including, without limitation, credit card numbers, charge amounts and authorization codes, for a period of not less than two (2) years. 3. Inquiry & Adiustments. Client shall be responsible for all End-User inquiries that may arise regarding the billed transactions and shall communicate directly with its merchant bank regarding such matters. EBI shall provide reasonable support to Client including, without limitation, providing copies of information collected through the Payment Page, to assist Client in responding to End-User inquiries. 4. Collection of Information. Client shall co-operate with EBI in the collection, maintenance and storage of any End-User data that may be required to satisfy any federal, state and local regulations applicable to the services contemplated herein. {- End of Schedule IV. Remainder of page intentionally left blank. -} Payment One - NOL Amend MSA 2. - Final.doc - CONFIDENTIAL - Page 7 of 17 SCHEDULE V - Service Order for AUTOMATED CLEARINGHOUSE (ACH) Services This Service Order for Automated Clearinghouse Services ("Service Order") shall be effective as of the Amendment Date. This Service Order may be terminated by either party by providing the other party with at least 30 days prior written notice. Otherwise, this Service Order shall remain in full force and effect until termination of the Agreement. 1. Service Order Summary. EBI maintains a relationship with a third-party processor (the "Processor"), which is affiliated with an Originating Depository Financial Institution ("ODFI"). The Processor and ODFI are associated with the National Automated Clearing House Association ("NACHA"). Client has requested that EBI cause its Processor to permit Client to initiate electronic fund transfer entries (each an "Entry" or collectively "Entries") through the ODFI for the deposit ("Credit") and/or collection ("Debit") of money to and from the accounts of Client's customers maintained at participating depository financial institutions, by means of the Automated Clearing House ("ACH") network. 2. Operating Rules. (a) Client shall comply with the operating rules of the NACHA, in existence as of the date of this Agreement and as amended from time to time (herein collectively referred to as the "ACH Rules"). The duties of the Client set forth herein in no way limit the requirements of complying with the ACH Rules. (b) Client is subject to applicable U.S. law when initiating ACH Entries. This includes, among other things, that Client is not violating the Office of Foreign Assets Control ("OFAC") enforced sanctions, and is not acting on behalf of, or transmitting funds to or from, any party subject to such sanctions. Client shall only originate lawful ACH Entries, and is strongly encouraged to obtain Specially Designated National ("SDN") and other compliance information directly from the OFAC at (800) 540-OFAC or at http://www.treas.gov/ofac/. 3. Client Authorizations and Records Retention. Before the initiation by Client of any Credit or Debit Entry to a customer's account, Client shall obtain from such customer an authorization to make one or more Entries to the customer's account. Sample authorization forms are available in the ACH Rules or from EBI upon request. Such authorization shall comply with the ACH Rules. Each Entry thereafter will be made pursuant to such authorization. Client will initiate no Entry after such authorization has been revoked or the arrangement between Client and such customer has terminated. Client shall retain the original or copy of each authorization for a period of not less than two (2) years from the termination or revocation of the authorization, and will furnish such original or copy to EBI, or to any applicable ODFI, upon request. The Processor and the ODFI will retain records of all Entries for six (6) years from the date the Entry was transmitted, and will provide a related party requesting the information with a printout or reproduction of the information relating to the Entry. 4. Customer Pre-Notification. Client shall send pre-notification that it intends to initiate an Entry or Entries to a customer's account within the time limits prescribed by the ACH Rules. Such pre-notification shall be provided to EBI in the format and on the medium prescribed by the ACH Rules or otherwise as mutually agreed to by the parties. If Client has received notice that such pre-notification has been rejected within the prescribed period by a receiving depository financial institution ("RDFI") as defined by the ACH Rules, Client Payment One - NOL Amend MSA 2. - Final.doc - CONFIDENTIAL - Page 8 of 17 will not initiate any corresponding Entry to such customer's account until the cause for rejection has been corrected and another pre-notification has been submitted and accepted within the time limits prescribed by the ACH'Rules. 5. Delivery of Entry Information. Client shall deliver each Entry or file of Entries to the location specified by EBI in accordance with the delivery method set forth in Exhibit V-A, attached hereto, and in accordance with the schedule set forth by the parties in the Time Specifications for File Delivery, attached hereto as Exhibit V-B. All Entry information so delivered shall be in the medium required by the Processor and the format required by the ACH Rules or otherwise acceptable to EBI. All Entries shall be received, processed and transmitted by EBI's Processor pursuant to the ACH Rules. 6. Settlement by Client for Entries. Client shall maintain a checking account (the "Settlement Account" as further described in Exhibit V-D, attached hereto) with a balance sufficient to offset any Credit Entries submitted, any rejected Debit Entries and any other fees or charges to which EBI is entitled hereunder. EBI's Processor shall be authorized to immediately debit the Settlement Account as necessary to fund Entry deposits and any adjustments. If Client discovers that any Entry it has initiated was in error, it may notify EBI of such error and EBI will utilize all reasonable efforts on behalf of Client, consistent with the ACH Rules to correct the Entry. In all such cases, it shall be the responsibility of Client to notify its affected customers that an Entry has been made, which is at variance with the customer's authorization or is otherwise erroneous. NOTIFICATION OF ENTRIES, INCLUDING NOTIFICATION OF ENTRY ERRORS, MUST BE AUTHORIZED BY INDIVIDUALS NAMED IN EXHIBIT V-C. If at anytime Client's Settlement Account has an insufficient balance to cover transactions for which it is intended, EBI may, in addition to any other remedy, suspend all services under this Service Order until such time as the balance in the Settlement Account is properly funded. In the event that EBI's Processor requires the establishment of a reserve account with respect to Client's Entries, Client shall use reasonable efforts to fund such reserve requirement or otherwise modify its sales process to mitigate such requirement. 7. Customer's Right to Refund for Debit Entries. Client acknowledges the right of a customer to obtain a refund of the funds debited from customer's account by such customer sending a notice to an RDFI or ODFI, as applicable, within sixty (60) days after any Debit Entry is made to customer's account or fifteen (15) days after customer's monthly statement is made available to customer, whichever occurs first, identifying the Entry, stating it was an error, and demanding that the amount of the Debit Entry be credited back to customer's account. Client agrees to promptly reimburse EBI for all funds due to customers that have followed the notification procedure described in this paragraph 7. {- End of Schedule V. Exhibits follow. Remainder of page intentionally left blank. -} Payment One - NOL Amend MSA 2. - Final.doc - CONFIDENTIAL - Page 9 of 17 Exhibit V-A: ACH File Transmission 1. File Specifications. Client shall deliver an ACH file in the NACHA Standard format as specified in the NACHA manual ACH Rules or such other format as the parties may mutually agree to. 2. Delivery of File to Processor. Client must deliver the ACH file to EBI's Processor using either: a) a modem approved by EBI running at speeds not below 2400 baud and not to exceed 56K baud; or b) through an online link to EBI's file transfer protocol site specifically established for such purpose. Using the transmission program in the software provided by EBI or other suitable software approved by EBI, Client will be assigned, by EBI's Processor, a sign-on identification code and password to deliver files to EBI's Processor. Any attempt to deliver a file without the proper sign-on and password will result in an unsuccessful file transmission. A successful transmission of an ACH file in no way means a successful receipt of an ACH file for processing by EBI's Processor. Client assumes responsibility for the receipt of a positive acknowledgment of successful file transmission. 3. Verification, Authorization. Client shall provide, by fax or on-line mail to EBI's Processor authenticating data, including, without limitation, file name, total number of transactions, total Debit Entries, total Credit Entries, file modifier, and an authorizing signature by an official of Client as defined in Exhibit V-E. Client's authorizing official may be contacted by EBI's Processor to ascertain file validity before file is accepted for processing. Processor assumes no responsibility for file rejection due to its inability to confirm file validity. Payment One - NOL Amend MSA 2. - Final.doc - CONFIDENTIAL - Page 10 of 17 Exhibit V-B: Time Specifications for File Delivery Client shall deliver, to EBI's Processor, an ACH file in accordance with the time specifications set forth below: Credit Transactions shall be delivered on or before two business days prior to the Entry effective date of the transactions contained within the ACH file. Debit Transactions shall be delivered on or before two business days prior to the Entry effective entry date of the transactions contained within the ACH file. All files must be delivered to EBI's Processor by 3:00 p.m. EST in order to be included in that day's submission. Payment One - NOL Amend MSA 2. - Final.doc - CONFIDENTIAL - Page 11 of 17 Exhibit V-C: Authorized Signatures The following personnel are authorized to create and transmit ACH files for Client: Jessica Benshay /s/ Jessica Benshay 305 503 8606 - -------------------------------- ---------------------- ------------------ Authorized Person (please print) Signature Telephone # - -------------------------------- ---------------------- ------------------ Authorized Person (please print) Signature Telephone # - -------------------------------- ---------------------- ------------------ Authorized Person (please print) Signature Telephone # - -------------------------------- ---------------------- ------------------ Authorized Person (please print) Signature Telephone # - -------------------------------- ---------------------- ------------------ Authorized Person (please print) Signature Telephone # - -------------------------------- ---------------------- ------------------ Authorized Person (please print) Signature Telephone # - -------------------------------- ---------------------- ------------------ Authorized Person (please print) Signature Telephone # - -------------------------------- ---------------------- ------------------ Authorized Person (please print) Signature Telephone # Client is responsible for notifying EBI in writing of any changes to Client's authorized personnel. EBI accepts no responsibility for files created by terminated employees, or personnel whose authorization has been revoked by Client, unless Client has notified EBI in writing of such termination or revocation at least two (2) business days prior to submission of ACH files for processing. Payment One - NOL Amend MSA 2. - Final.doc - CONFIDENTIAL - Page 12 of 17 Exhibit V-D: Settlement Information All debit entries originated by Client will be settled via ACH credit by the Processor two (2) days following the Entry effective date or the settlement date assigned by the ACH operator whichever is later. All returns received by Processor for Client shall be debited or credited to Company's settlement account immediately upon receipt of such return. EBI and/or its Processor reserve the right to debit Client's Settlement Account for a period of ninety (90) business days after the termination of this contract. This debit is for the explicit purpose of reclaiming moneys owed EBI or its Processor for any fees or returns incurred during the term of the Agreement. Settlement Account. Bank Name ----------------------------------------------------------------------- Bank ABA Number ----------------------------------------------------------------- Bank Account Number ----------------------------------------------------- Account Name ------------------------------------------------------------ EBI is authorized to debit the above-named account for any fees and charges that are not otherwise paid by Client as and when due. - -------------------------------------------------------------------------------- Company Signature Title Date Payment One - NOL Amend MSA 2. - Final.doc - CONFIDENTIAL - Page 13 of 17 MASTER SERVICES AGREEMENT ("Agreement") Between PaymentOne Corporation (f.k.a. eBillit, Inc.) ("EBI") And Liberty Online Services, Inc. ("Client") The parties hereto agree, effective as of December 1, 2002 to hereby establish an agreement with identical terms and conditions as defined and agreed to between EBI and National Online Services, Inc. under that certain Master Services Agreement dated March 30, 2001, with subsequent amendments dated October 1, 2002 and December 1, 2002 (collectively the "Amended MSA"). This Agreement shall expire on March 30, 2005, in accordance with the terms of the Amended MSA. IN WITNESS WHEREOF, the parties have executed this Agreement to be effective as of the date first set forth above. PaymentOne Corporation Liberty Online Services, Inc. BY: /s/ Joe Lynn BY: /s/ William D. Rhodes, Jr. ---------------------------- -------------------------- NAME: Joe Lynn NAME: William D. Rhodes, Jr. -------------------------- ------------------------ TITLE: CEO TITLE: President ------------------------- ----------------------- DATE: 12/9/02 DATE: 12/6/02 -------------------------- ------------------------ Payment One - NOL Amend MSA 2. - Final.doc - CONFIDENTIAL - Page 14 of 17 MASTER SERVICES AGREEMENT ("Agreement") Between PaymentOne Corporation (f.k.a. eBillit, Inc.) ("EBI") And AmeriLinc, Inc. ("Client") The parties hereto agree, effective as of December 1, 2002 to hereby establish an agreement with identical terms and conditions as defined and agreed to between EBI and National Online Services, Inc. under that certain Master Services Agreement dated March 30, 2001, with subsequent amendments dated October 1, 2002 and December 1, 2002 (collectively the "Amended MSA"). This Agreement shall expire on March 30, 2005, in accordance with the terms of the Amended MSA. IN WITNESS WHEREOF, the parties have executed this Agreement to be effective as of the date first set forth above. PaymentOne Corporation AmeriLinc, Inc. BY: /s/ Joe Lynn BY: /s/ William D. Rhodes, Jr. ---------------------------- -------------------------- NAME: Joe Lynn NAME: William D. Rhodes, Jr. -------------------------- ------------------------ TITLE: CEO TITLE: President ------------------------- ----------------------- DATE: 12/9/02 DATE: 12/6/02 -------------------------- ------------------------ Payment One - NOL Amend MSA 2. - Final.doc - CONFIDENTIAL - Page 15 of 17 MASTER SERVICES AGREEMENT ("Agreement") Between PaymentOne Corporation (f.k.a. eBillit, Inc.) ("EBI") And SBA Online, Inc. ("Client") The parties hereto agree, effective as of December 1, 2002 to hereby establish an agreement with identical terms and conditions as defined and agreed to between EBI and National Online Services, Inc. under that certain Master Services Agreement dated March 30, 2001, with subsequent amendments dated October 1, 2002 and December 1, 2002 (collectively the "Amended MSA"). This Agreement shall expire on March 30, 2005, in accordance with the terms of the Amended MSA. IN WITNESS WHEREOF, the parties have executed this Agreement to be effective as of the date first set forth above. PaymentOne Corporation SBA Online, Inc. BY: /s/ Joe Lynn BY: /s/ William D. Rhodes, Jr. ---------------------------- -------------------------- NAME: Joe Lynn NAME: William D. Rhodes, Jr. -------------------------- ------------------------ TITLE: CEO TITLE: President ------------------------- ----------------------- DATE: 12/9/02 DATE: 12/6/02 -------------------------- ------------------------ Payment One - NOL Amend MSA 2. - Final.doc - CONFIDENTIAL - Page 16 of 17 MASTER SERVICES AGREEMENT ("Agreement") Between PaymentOne Corporation (f.k.a. eBillit, Inc.) ("EBI") And Epixtar Communications Corp. ("Client") The parties hereto agree, effective as of December 1, 2002 to hereby establish an agreement with identical terms and conditions as defined and agreed to between EBI and National Online Services, Inc. under that certain Master Services Agreement dated March 30, 2001, with subsequent amendments dated October 1, 2002 and December 1, 2002 (collectively the "Amended MSA"). This Agreement shall expire on March 30, 2005, in accordance with the terms of the Amended MSA. IN WITNESS WHEREOF, the parties have executed this Agreement to be effective as of the date first set forth above. PaymentOne Corporation Epixtar Communications Corp. BY: /s/ Joe Lynn BY: /s/ William D. Rhodes, Jr. ---------------------------- -------------------------- NAME: Joe Lynn NAME: William D. Rhodes, Jr. -------------------------- ------------------------ TITLE: CEO TITLE: President ------------------------- ----------------------- DATE: 12/9/02 DATE: 12/6/02 -------------------------- ------------------------ Payment One - NOL Amend MSA 2. - Final.doc - CONFIDENTIAL - Page 17 of 17 AMENDMENT NUMBER ONE to the MASTER SERVICES AGREEMENT ("Agreement") between eBillit, Inc. ("EBI") and National Online Services, Inc. ("Client") dated March 31, 2001 The parties hereto agree, effective as of October 1, 2002, as follows: 1. All capitalized terms not defined herein shall have the meaning ascribed to them under the Agreement. 2. The Initial Term to hereby amended to be four (4) years from the Effective Date. 3. Section "1" of Exhibit "B" to the Agreement is hereby amended by replacing it entirely with the following: "1 PhoneBill Services (Telco Billing) a) Initial Account Setup Fee: (Paid in full) $5,000.00 one time Additional Accounts (Waived for up to two Accounts) $1,500.00 each b) EBI Processing Fee for Monthly Recurring charges ("426001" records): Gross Dollars Deposited each Month times 3% c) EBI Processing Fee for 1+ toll charges ("01xx01" records); Willing Transaction Deposited Monthly Fee; Greater of: ------------------- ---------------- First 100,000 $0.0475 per Transaction or 1% of billed amount Next 2000000 $0.0425 per Transaction or 1% of billed amount Next 300,000 $0.0375 per Transaction or 1% of billed amount Next 400,000 $0,0325 per Transaction or 1% of billed amount All Remaining $0,0275 per Transaction or 1% of billed amount Note: The total EBI Processing Fee for each Deposit Month shall be the greater of: i) the fees calculated in parts b) and c), above; ii) $0.85 per unique monthly recurring charge; at iii) a minimum monthly fee based on the Deposit Months and amounts set forth in the following schedule: October, 2002 thru December, 2002 - $10.000.00. January, 2003 and thereafter - $16,000.00." NOS Amend MSA CONFIDENTIAL Page 1 of 2 4. The first paragraph of Section 7 of Schedule II is hereby amended by replacing it in its entirety with the following: "1. "SETTLEMENT OF AMOUNTS DUE. Client shall be entitled to the gross value of the Billing Transactions remitted to the Telcos less any applicable Unbillables, Adjustments, Telco Holdback, Excess Uncollectables (pursuant to any True-Ups), Fees, Telco Fees and EBI Reserves (such difference the "Net Proceeds"). EBI shal1 calculate a "Pre-Pay Rate" by dividing the actual Net proceeds for the three most recently settled Deposit Months by the face value of the Billing Transactions for such Deposit Months, and multiplying such quotient by 90%. On the first scheduled payment date (the "Pre-Pay Date") occurring 60 days following the end of a Deposit Month (the "Prey-paid Deposit Month"), EBI shall pay to Customer the Pre-Pay Rate for the Billing Transactions relating to the Pre-Paid Deposit Month (hereafter the "Pre-Paid Proceeds"). Within 30 days of each Pre-Pay Date, EBI shall determine the difference, if any, between actual Net Proceeds and Pre-Paid Proceeds for the subject Pre-Paid Deposit Month and EBI shall either (i) remit any excess Net Proceeds to Customer, (ii) apply any difference on the next scheduled Pre-Pay Date, or (iii) invoice Customer for any shortfall in Net Proceeds. In addition to the Net Proceeds, Client shall be entitled to any excess Telco Holdback (pursuant to any True-Ups) and any excess EBI Reserve as set forth below. All payments to Customer shall be by bank wire and Customer is responsible for providing complete and accurate wire instructions in writing to EBI." 5. All other terms and conditions of the Agreement shall remain in full force and effect. IN WITNESS WHEREOF, the parties have executed this amendment to the Agreement to be effective as the date first set forth above. eBillit, Inc. National Online Services, Inc. BY: /s/ Evan B. Meyer BY: ------------------------------ ------------------------------- NAME: Evan B. Meyer NAME: ---------------------------- ----------------------------- TITLE: CFO TITLE: President ---------------------------- ---------------------------- DATE: 10/3/02 DATE: 10/3/02 ---------------------------- ---------------------------- NOS Amend MSA CONFIDENTIAL Page 2 of 2 EX-10.9 12 b331272_ex10-9.txt SERVICE BUREAU AGREEMENT Exhibit 10.9 SERVICE BUREAU BILLING SERVICES AGREEMENT BETWEEN ACI BILLING SERVICES, INC. AND EPIXTAR FINANCIAL CORP. THe AGREEMENT (including all attachments, exhibits, and schedules, the "Agreement") is entered into as of this 15th day of October, 2002 between ACI Billing Services, Inc. ("ACI"), a Delaware Corporation with headquarters located at 9255 Corbin Avenue, Northridge, CA 91324 and Epixtar Financial Corp. ("Customer") a Florida corporation, with offices located at 11900 Biscayne Boulevard, Suite 262, Miami, Florida 33181. WHEREAS, Customer provides telecommunications services or telecommunications related services directly or indirectly through its Clients (as defined below); WHEREAS, ACI is a provider of billing and collection services for the telecommunications industry; and WHEREAS, Customer for itself and its Clients desires to utilize ACI's billing and collection services; NOW, THEREFORE, in consideration of the foregoing and other good and valuable consideration, the sufficiency of which the parties herein acknowledge, the parties agree as follows: I. DEFINITIONS All terms and phrases used within this Agreement shall be defined in accordance with the everyday meaning used in the telecommunications industry unless such term has been defined in this Agreement. In addition, specified defined terms are as follows: "Client(s)" means a customer of Customer that provides various telecommunications services to End Users and whose records Customer desires ACI to process. "Governmental Authority" means any nation or government, any state or other political subdivision thereof and any entity exercising executive, judicial, regulatory, or administrative functions of or pertaining to government (including, without limitation, the Federal Communications Commission ("FCC"), the Federal Trade Commission ("FTC") and any Public Utilities Commission and/or Public Service Commission (collectively "PUC"). "Person" means any individual, corporation, partnership, joint venture, association, trust, or any other entity or organization of any kind or character, including a Governmental Authority. -1- II. PURPOSE The Purpose of this Agreement is for ACI to provide certain billing and collection and related services to Customer. These services are more specifically set forth in the attachments enumerated below. Customer is only requesting and is only being provided those services set forth in the attachment(s), which are signed and executed by the parties. 2.1 THE SERVICES AVAILABLE TO CUSTOMER ARE AS FOLLOWS: a. LEC Billing and Collection Services - Attachment 1 1. 1+, 0+/-, SSM, and Enhanced Services - Schedule 1-A b. 900/Pay Per Call Services - Attachment 2 c. Selective Outclearing - Attachment 3 d. CDR Rating and Formatting - Attachment 4 e. Direct (non-LEC) billing - Attachment 5 III. TERM The Agreement shall be effective for an initial term beginning on the date billable records are first submitted to ACI, and ending three (3) years thereafter (the "Initial Term"). Unless terminated in accordance with the terms herein, this Agreement shall automatically renew for successive one (1) year terms beyond its Initial Term until the earlier of (i) termination as provided in the Agreement, or (ii) either of the parties notifies the other in writing at least ninety (90) days prior to the end of the then applicable term that the term will not be extended. IV. CUSTOMER'S REPRESENTATIONS, WARRANTIES AND OBLIGATIONS 4.1 CUSTOMER HEREBY REPRESENTS AND WARRANTS TO ACI AS FOLLOWS: a. Neither the execution and delivery of this Agreement by Customer nor the performance by Customer of its obligations hereunder will: (i) result in a violation of or default under any of the terms, conditions, or provisions of any material license, agreement, lease, or other obligation to which Customer is a party or by which it is bound, including but not limited to any existing billing services agreement with another company, or (ii) violate any material order, writ, injunction, decree, statute, rule, or regulation applicable to Customer or its properties or assets. b. All information provided by Customer to ACI pursuant to this Agreement is true and accurate in all respects. Customer will update any information required by ACI, and if specifically requested by ACI, will do so within five (5) days of receipt of each written request from ACI. 4.2 CUSTOMER HEREBY ACKNOWLEDGES THE FOLLOWING OBLIGATIONS a. Customer will designate the name of, and at all times during the term of the Agreement, maintain a representative ("Customer Representative") who will be an officer or employee of Customer and who will be authorized to act as the primary point of contact for ACI in dealing with Customer with respect to the services -2- provided under this Agreement. Customer will notify ACI in writing of any change in the person acting as the Customer Representative at least ten (10) days prior to the effectiveness of such change. The Customer Representative will be responsible for directing, insofar as ACI is concerned, all activities of Customer affecting the provision of ACI's services. ACI will be entitled to rely upon any instructions or information provided to ACI by the Customer Representative, and ACI will incur no liability in so relying. Customer agrees and confirms that Customer is fully responsible financially and otherwise for all instructions, data, and/or information provided to ACI. b. Customer will cooperate with ACI (a) to establish the services to be provided to Customer and (b) in good faith in the performance of Customer's activities contemplated by this Agreement, Customer will make available, as reasonably requested by ACI, such information, facilities, management decisions, approvals, authorizations and acceptances in order that ACI's provision of services under this Agreement may be accomplished in a proper, timely and efficient manner. c. Customer will comply with all ACI policies, and each policy shall be deemed to be a part of this contract as if fully set forth herein. 4.3. SERVICES FOR RECORDS OF CLIENTS ACI reserves the right, in its sole and absolute discretion to refuse to provide services relating to the records of a Client. ACI will provide notice if it does not provide service as noted in the previous sentence. As a condition to providing services relating to the records of any Client, Customer hereby agrees and confirms that Customer is fully responsible, financially and otherwise, for any and all records processed by ACI pursuant to this Agreement, whether such records originate with Customer's End Users or End Users of any of Customer's Clients. ACI has the right and authority to treat all such records as if such records were submitted for processing by Customer on its own behalf, irrespective of the source of such records, and such authority will include, without limitation, the right to deduct any fees, charges, adjustments, or expenses of ACI or any third party out of the proceeds of all such records. Customer will be solely responsible for communicating with Clients regarding the services hereunder relating to the records originating with Clients. V. REMEDIES AND DISPUTE RESOLUTION 5.1. REMEDIES OF ACI The parties specifically agree that any breach of this Agreement by Customer, will be difficult to compensate in damages and would jeopardize the ability of ACI to continue providing services to other customers. It is agreed, therefore, that in the event of such breach of this Agreement, ACI shall be entitled to seek and obtain injunctive or any other relief available in a court having appropriate jurisdiction without further proof than as offered in this paragraph, and that the sum, up to and not to exeed $10,000, shall be good and sufficient bond for such relief. Notwithstanding the preceeding paragraph, ACI may also elect any or all other remedies available to it, including but not limited to damages, at law or in equity. 5.2. ARBITRATION a. For any controversy between the parties relating to this agreement, the parties agree to submit such controversy to binding arbitration by a single arbitrator pursuant to the Commercial Arbitration rules of the American Arbitration Association. A party may demand such arbitration in accordance with the procedures set out in those rules. b. Discovery shall be controlled by the arbitrator and shall be governed by the Federal Rules of Civil Procedure. The party seeking discovery shall reimburse the responding party for the cost of the production of -3- documents, including search time and reproduction costs. The arbitration shall be held in Los Angeles County, California. The arbitrator shall control the scheduling so as to process the matter expeditiously. The parties may submit written briefs. The arbitrator shall rule on the controversy by issuing a written opinion within thirty (30) calendar days after the close of the arbitration hearing. The time frame specified in this Section 5.2(b) may be extended upon mutual agreement of the parties or by the arbitrator upon a showing of good cause. c. Except as provided in paragraph 5.2(b) above, each party shall bear its own fees, costs and expenses of arbitration, including, but not limited to, its own legal and expert witness fees. The parties shall equally split the fees of the arbitration and the arbitrator. The arbitrator may award reimbursement of costs and/or fees to the prevailing party. d. Any award rendered by the arbitrator will be final, conclusive, and binding upon the parties, and any judgment thereon may be entered and enforced in any court of competent jurisdiction. e. Other than those matters set forth in Section 5.1 or involving injunctive relief as a remedy or any action necessary to enforce the award of the Arbitrator, the parties agree that the provisions of this Section 5.2 are a complete defense to any suit, action, or other proceeding instituted in any court or before any administrative tribunal with respect to any dispute, controversy, or claim arising under or in connection with this Agreement or the provision of services by ACI. Nothing in this Section 5.2 will prevent the parties from exercising their rights to terminate this Agreement in accordance with the term of this Agreement. VI. NOTICES Except as otherwise expressly provided in this Agreement, all notices, requests, claims, demands, designations, approvals, consents, acceptances and other communications under this Agreement will be in writing and will be deemed to have been duly given if delivered personally, telecopied or mailed by certified or registered mail, return-receipt requested, postage prepaid, or overnight mail to the parties at the addresses specified below. If delivered personally, it will be deemed given upon delivery; if delivered by telecopy with a copy subsequently mailed, in the manner described above, when received if contemporaneously confirmed by the telecopy machine, unless receipt is not during normal business hours of recipient, then receipt will be deemed given upon commencement of normal business hours of recipient. If delivery by overnight mail, notice shall be deemed received the next business day. All notices and other communications under this Agreement are addressed as provided below. If to ACI, address to: With a copy to: ACI Billing Services, Inc. ACI Billing Services, Inc. 9255 Corbin Avenue 190 South La Salle St., Ste. 1710 Northridge, California 91324 Chicago, Illinois 60603 Attention: General Counsel Attention: President Telecopy: (818) 709-1825 Telecopy: (312) 419-0172 If to Customer, address to: With a copy to: Epixtar Financial Corp. Epixtar Financial Corp. 11900 Biscayne Boulevard, Suite 262 11900 Biscayne Boulevard, Suite 262 Miami, Florida 33181 Miami, Florida 33181 Attention: William Rhodes Attention: Deborah Gambone Telecopy: (305) 503-8610 Telecopy: (305) 503-8610 -4- VII. CONFIDENTIALITY 7.1 CONFIDENTIALITY Except as otherwise provided in this Agreement, each of the parties agree that all information communicated to it by the other party, whether before or after the date of this agreement, will be designated confidential information ("Confidential Information"), and will be deemed to have been received in strict confidence and will be used only for the purposes of carrying out the obligations of, or as otherwise contemplated by, this Agreement. Without obtaining the prior written consent of the other party, neither party will disclose any such Confidential Information received from the other party; provided, however, that this Section 7.1 will not prevent a party from disclosing any such information that: (a) was already in the possession of such party without being subject to other confidentiality obligations; (b) is or becomes generally available to the public other than as a result, directly or indirectly, of a disclosure of such Confidential information by such party or by other persons to whom such party disclosed such information; (c) is or becomes available to such party on a nonconfidential basis from a source other than the other party or its representatives, provided that such source is not bound by a confidentiality agreement with the other party; (d) is independently developed by such party without the use of the other party's Confidential Information; (e) is required to be disclosed pursuant to an arbitration proceeding conducted in accordance with Section 5.2, provided that such disclosure is made in accordance with the approval and at the direction of the arbitrator; (f) is required to be disclosed pursuant to a requirement of any Governmental Authority or any statute, rule, or regulation, provided that such party gives the other party prompt notice of such requirement prior to any such disclosure; (g) is reasonably requested by a Governmental Authority; (h) for purposes of Attachment 1 only, (i) is reasonably necessary to be disclosed in connection with a billing inquiry by an End User, or (ii) for purposes of Attachment 1 only, is reasonably requested by any LEC. 7.2. PUBLIC ANNOUNCEMENTS All public announcements by either of the parties relating to this Agreement except for announcements intended solely for internal distribution to directors, officers and employees, or any disclosures required by legal, accounting, regulatory or stock exchange requirements beyond the reasonable control of such parties, will be coordinated with and approved by both parties prior to the release thereof. VIII. SEVERABILITY If any provision of this Agreement is declared judicially invalid, unenforceable or void, such decision will not have the effect of invalidating or voiding the remainder of this Agreement, it being the intent and agreement of the parties that this Agreement will be deemed amended by modifying such provision to the extent necessary to render it valid, legal and enforceable while preserving its intent. If such modification is not possible, another provision that is legal and enforceable and that achieves the same objective will be substituted. Notwithstanding the above, if any provision referred to in this Article VIII is declared judicially to be invalid, unenforceable or void, and the fact thereof, or any amendment or modification thereto materially affects the payments to be made to ACI under this Agreement, then ACI may, at its sole discretion, terminate this Agreement in its entirety. IX. WAIVERS No delay or omission on the part of any party in exercising any right or privilege under this Agreement will operate as a waiver thereof. -5- X. ENTIRE AGREEMENT This Agreement (including the attachments, schedules and exhibits hereto) constitute the entire agreement between the parties and supersedes all prior and contemporaneous agreements and understandings, whether written or oral, between the parties. There are no representations, understandings or agreements relating to this Agreement that are not fully expressed herein. This Agreement may not be modified or amended except by a written instrument executed by or on behalf of each of the parties to this Agreement. XI. ASSIGNMENT This Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns; however, Customer shall not have the right to assign or transfer its obligations under this Agreement without the prior written consent of ACI, which consent shall not be unreasonably withheld. XII. NO THIRD PARTY BENEFICIARY / SERVICE TO OTHERS This Agreement is not intended, nor will it be construed, to create or convey any right upon any Person not a party to this Agreement. ACI will not be responsible, financially and/or otherwise, for the services provided hereunder to any party other than Customer. The parties acknowledge that any services provided by ACI relating to records originating from Clients are services done only for and on behalf of Customer and only at the request of Customer. Nothing in this Agreement shall preclude ACI from performing the same or similar services to other Persons. XIII. GOVERNING LAW AND VENUE This Agreement shall be deemed to be a contract made under the laws of the State of California, and the construction, interpretation and performance of this Agreement and all transactions hereunder shall be governed by the civil laws of California, and specifically irrespective of those laws regarding choice of law which would result in application of the law of another jurisdiction. Venue for any permitted action arising out of or related to this Agreement or the conduct of the parties hereunder shall only be Los Angeles, County, California. The parties hereby waive any objection to venue in Los Angeles, County, California. XIV. HEADINGS The Article and Paragraph headings in this Agreement are for convenience of reference only and in no way define, extend, or describe any of the terms herein or affect the meaning or interpretation of the provisions of this Agreement. XV. COMPLIANCE WITH LAWS In performing its obligations under this Agreement, ACI will not be required to undertake any activity that would conflict with the requirements of any applicable statute, rule, regulation, interpretation, judgment, order or injuction of any Governmental Authority, and for purposes of Attachment I only, LEC policies. -6- XVI. RELATIONSHIP OF PARTIES In furnishing the Services to, or on behalf of, Customer, whether records orignate from Customer, or a Client, ACI is acting only as an independent contractor. ACI does not undertake by this Agreement or otherwise to perform any obligation of Customer, whether regulatory or contractual, or to assume any responsibility for Customer's business or operations. ACI will not be considered or be deemed to be an agent, employee, joint venturer or partner of Customer, and no other relationship is inteneded or created by and between ACI and Customer. ACI has the sole right to supervise, manage, contract, direct, procure and provide, or cause to be provided, all services to be provided pursuant to this Agreement. XVIl. COUNTERPARTS This Agreement may be executed in multiple counterparts, each of which will be deemed an original and all of which taken together will constitute one instrument. A fax signature is deemed an original. -7- IN WITNESS WHEREOF, the parties have duly executed and delivered this Agreement as of the date first set forth above. EPIXTAR FINANCIAL CORP. ACI BILLING SERVICES, INC. By /s/ William D. Rhodes, Jr. By: /s/ Michael Labedz ----------------------------- ----------------------------------- Name: William D. Rhodes, Jr. Name: Michael Labedz --------------------------- ----------------------------------- Title: President Title: President -------------------------- -------------------------------- Date: 10/15/02 Date: 12/03/02 --------------------------- --------------------------------- -8- ATTACHMENT 1 LEC SERVICE BUREAU BILLING AND COLLECTION I. DEFINITIONS All terms and phrases used within this Attachment shall be defined in accordance with the everyday meaning used in the telecommunication industry unless such term has been defined in this Agreement. In addition, specified defined terms are as follows. 1. Billable Call Detail Records - "BCDR" means records that: (i) consist of telephone records to be billed to telephone numbers having valid area code and exchange prefix numbers that (a) are listed on ACI's then current On-Net File provided (to Customer), (b) have not been previously rejected by ACI, (c) have not been previously billed by ACI or any other billing process, and (d) are an acceptable call record-type to ACI, or; (ii) are other services or products provided to End Users which have been approved for billing by ACI. 2. End Users - "End User" means the ultimate customer of the telephone information, or other services or products provided by Customer. 3. LEC - "LEC" means any Bell Operating Company, independent local exchange company, or provider of local telephone or other services that ACI is able to provide billing and collection services. II. BASIC LEC BILLING AND COLLECTION SERVICES The following describes the billing and collection services for LEC billing, whether for 1+, 0+/-, SSM, or Enhanced Services (Schedule 1-A) that ACI will provide to Customer. 2.1 ACI'S OUTCLEARING PROCESS a. Customer shall only submit BCDRs for billing. Notwithstanding the foregoing, BCDRs that do not otherwise meet the terms of this Agreement shall not be submitted to ACI nor will such BCDRs be accepted by ACI for billing. BCDRs will be submitted in the format specified by ACI, which is subject to change upon 30 days notice. Customer understands that testing may be required prior to submission of records to ACI and that such testing is at Customer's expense. b. ACI will subject Customer's records to various up-front edits, balancing and formatting. Records failing to pass these edits, balancing or formatting, referred to as "ACI Up-Front Rejects", will not be submitted to the LECs, and shall be returned to the Customer Representative. (See Section 4.2(a) of the main Agreement.) c. Within five (5) business days after ACI's receipt of the BCDRs from Customer, ACI will submit records passing the Up-Front Edits to the appropriate LEC for billing and collection. d. After ACI submits Customer's records to the LEC, the LEC subjects the BCDRs to detail screening and editing tests called "LEC Up-Front Edits". Records rejected by the LEC as a result of these edits are referred to as "LEC Up-Front Rejects." Any of Customer's records returned as unbillable by a LEC are referred to as "Returned Records", ACI will return such records to Customer. Records passing the LEC Up-Front Edits are deemed correct and eligible for billing by the LEC. 1 e. Generally, sixty to seventy days after LECs acceptance of Customer's BCDRs, the LEC will remit payment to ACI (the "Remittances"). Such monies are deposited by all LECs for all customers into ACI's bank account. f. After receipt by ACI of the Remittances, ACI will deduct from the Remittances all charges and fees specified in or as necessitated by this Agreement, including without limitation any amounts due ACI from time to time, such as: 1. ACI Fees and charges (Please see applicable schedules or provisions); 2. ACI LEC Billing Fees (Please see applicable Schedule). Such fees are subject to change; 3. ACI Reserves (Please see Article III below); 4. Unbillable records by the LECs, including those that failed the LEC Up-Front Edit Process; 5. Credits or adjustments issued to End Users by the LEC or by ACI; 6. Other charges or credits made by the LEC under its Agreement with ACI, including but not limited to any fines or penalties or assessments whatsoever billed to ACI by the LEC attributable to Customer, which can be based on End User complaints, regulatory complaints, any other act or omission by Customer in violation of the LEC's contract with ACI. g. Upon completion of the deductions described above, ACI shall disburse the remainder of the funds to its customers (such disbursements to Customer or the appropriate Client are referred to herein as the "Disbursements"). If requested in writing by Customer, ACI will make Disbursements to Customer or appropriate Client by wire or electronic funds transfer to the bank or other depository designated in writing by Customer. Customer shall be responsible for all wire and related charges. h. With respect to Disbursements made to any Client, ACI will, at the direction of Customer, deduct from any such Disbursements applicable fees due Customer from such Client. Customer will provide ACI Billing Services with a written, detailed schedule of its applicable fees for each such Client (the "Customer Fees") at least ten days prior to such Disbursements to Clients. Any such Customer Fees will be remitted to Customer periodically, prior to Disbursements being paid to Clients. The parties acknowledge that deduction of Customer Fees by ACI and payment to Client pursuant to this paragraph will constitute professional services as set forth in section 3 of Exhibit E attached hereto. i. To the extent possible, ACI will chargeback (or credit) Customer for items received from the LECs and/or items related specifically to End Users billed on behalf of Customer (such as for adjustments, chargebacks, credits and unbillables). In those cases where ACI does not receive End User or Customer specific data from the LECs, Customer will be charged back (or credited) based on the relative volume that its adjustments, chargebacks, credits, unbillables or volumes bear to all ACI customers' adjustments, chargebacks, credits, unbillables or volumes, or such other method as ACI determines in its sole discretion is appropriate based on empirical data available to ACI. III. RESERVES 3.1 BAD DEBT RESERVE AND BAD DEBT RESERVE TRUEUPS Customer understands that LEC charges are for unbillable records, uncollectable accounts, bad debt trueups and Customer adjustments (collectively "Chargebacks"). Chargebacks are frequently not fully known to ACI or to the LECs for up to eighteen months after records are billed to the End User. Customer also understands that Customer and ACI have a mutual interest in ensuring that adequate Customer funds are available when such charges become known. To ensure that sufficient funds are available to repay such Chargebacks, as well as any and all fees, charges or liabilities that may be owed to ACI or the LECs 2 (collectively "Liabilities"), ACI will require and will hold a Bad Debt Reserve based on actual and estimated Chargebacks to cover any projected or actual Liabilities. This Bad Debt Reserve may be adjusted periodically, at ACI's discretion, as Chargebacks are trued-up. ACI will then deduct such amounts from Disbursements to maintain the necessary reserve balance. Any remaining reserve balance will be returned to Customer or its Client, as the case maybe, at such time and in such amounts after all Chargebacks and Liabilities have been determined and deducted by ACI. 3.2 TERMINATION RESERVE At the termination of this Agreement, or when Customer's revenue volume accepted by the LECs declines for two consecutive months by 25% or more from the prior month (for example, the revenue volume for each of February and March declines by 25% or more from the level in January). Customer will deposit with ACI and/or ACI will deduct from Disbursements an amount equal to ten percent (10%) of the prior 90 days gross accepted revenues. In addition, ACI may require an increase in this Termination Reserve as it determines the amount reasonably needed to protect it from future Chargebacks and/or Liabilities. Any Termination Reserve balance will be returned to Customer at such time and in such amounts after all Chargebacks and Liabilities have been determined and deducted by ACI. IV. TAXES 4.1 TAXES BILLED AND COLLECTED BY THE LECS a. In the normal course of the Billing and Collection process, LECS will bill and collect various federal, state and local taxes and tax-like charges on records according to the LECS understanding of the various statutory requirements. b. Each month the LECS provide ACI an accounting of taxes billed and collected on behalf of ACI's customers and remit adequate funds to enable ACI to report and pay to each taxing authority the taxes the LECs have determined are due. c. As a service to ACI's customers, ACI will file consolidated tax returns to be prepared and filed for amounts billed by the LECs for all customers of ACI. Customer authorizes ACI to combine its taxes with other ACI customers' taxes in order to file consolidated tax returns on its behalf. Customer further acknowledges that ACI prepares and files tax returns based solely on information provided by the LECs and makes no attempt to independently verify the accuracy or appropriateness of the LECs accountings. d. Customer will advise ACI of any tax or tax-like charges that it believes are unique to Customer's and/or any Client's products that might otherwise be taxed at erroneous rates by the LECs. ACI will evaluate Customer's proposed charges(s) and determine in its sole discretion the reasonableness in requesting the LECs to change their standard taxing procedures. ACI will then use commercially reasonable efforts to cause the LECs to bill End Users for such taxes. e. Customer acknowledges and agrees that ACI is acting only with respect to arranging for the billing and collection of taxes merely on the customer's behalf, and in no event shall ACI be entitled to retain or receive from Customer (or from any End User) any statutory fee or share of taxes to which the Person collecting the same may be entitled under applicable law. f. Without limiting any other provision of this Agreement, Customer acknowledges and agrees that ACI will have no liability whatsoever to Customer or any Client if: (i) the LECs fail to calculate, or incorrectly calculate taxes, (ii) the LECs fail to furnish the information relating to the taxes to ACI, (iii) the LECs fail to bill, or incorrectly bill, the End Users, (iv) the LECs fail to properly establish the tax exempt status of End Users, or (v) ACI miscalculates any End User's taxes, whether resulting from the use by ACI of inaccurate or incomplete tax or End User information supplied to ACI by or through Customer, any 3 Client, or a third party or otherwise, including, but not limited to, the tax status of an End User or the applicable tax rates. Customer is solely responsible for the collection and remittance of any tax or tax like charge not collected or remitted by the LECs or ACI. 4.2 TAXES ON ACI AND LEC SERVICES Customer acknowledges that certain services performed by ACI are subject to state and local taxes. ACI will add such taxes to the amounts due ACI and cause such taxes to be reported and paid to the appropriate taxing authorities. V. INSPECTION Customer will inspect and review all reports and Disbursement information prepared by ACI and will notify ACI of any incorrect reports and Disbursement information within thirty (30) days after receipt thereof. Failure to notify ACI of any such incorrect report or information will constitute acceptance thereof, and waiver of any objections thereto. VI. INFORMATION REQUIRED FROM CUSTOMER PRIOR TO AND DURING BILLING Customer and each Client will be required to provide information or documents reasonably requested by ACI prior to, and after records are billed. Without limiting the previous sentence, any information requested by a LEC or Government Authority is deemed reasonable. VII. INQUIRY SERVICES As part of the LEC billing and collection service, ACI provides customer service inquiry: (i) During the Term, if required by a LEC and/or in lieu of inquiry services provided by one or more LEC, ACI shall (a) establish toll-free telephone numbers to be used by End Users for the purpose of making inquiries regarding charges for records reflected on End User bills issued by such LECs and (b) provide operators to assist End Users in connection with such inquiries (collectively, the "Inquiry Services"). Customer acknowledges that ACI's election to provide Inquiry Services will be made on a LEC-by-LEC basis and will include all records sent to that LEC by ACI. To the extent that ACI provides such Inquiry Services, ACI will instruct each LEC to refer all inquiries from End Users to such toll-free telephone numbers. (ii) In connection with any Inquiry Services that ACI may provide, ACI will establish and maintain written guidelines that describe the manner in which ACI will respond to End User inquiries, including without limitation the manner in which credits or other appropriate adjustments are to be made, with such supplements and amendments as may be necessary from time to time. ACI will provide Customer with a copy of such written guidelines and any supplements or amendments thereto upon Customer's request. ACI will be responsible for responding to all End User questions and problems related to records and will provide appropriate credits and adjustments, all in accordance with the procedures that it establishes. ACI will promptly notify Customer of all credits and adjustments issued by ACI on behalf of Customer or any Client. (iii) Upon the written request of Customer in connection with any Inquiry Services that ACI provides, as set forth herein, and upon ACI's sole reasonable discretion, ACI shall automatically transfer End User inquiries to Customer's call center for handling by Customer, provided Customer complies with the following: 4 (a) Customer must maintain a toll-free customer service telephone number to handle all End User inquiries which are automatically transferred to Customer's call center; (b) All End User inquiries must be handled only by live operators and not by message machine or other devices, at a service level that meets or exceeds parameters set from time to time by ACI; (c) ACI has the right at any time and from time to time to monitor calls to verify that End User inquiries are being handled appropriately by Customer's call center; (d) ACI will handle all End User credits or other adjustments and Customer will, within three (3) business days of the End user inquiry, provide to ACI all information necessary for ACI to provide such End User credits or adjustments in accordance with its established procedures. All such credit and adjustment information will be provided to ACI in a format approved by ACI. Customer agrees that it will not issue End User credits or adjustments of any type in a manner other than stated above; (e) Customer will be responsible for providing to ACI updated subscriber account information (name, address, service type, etc.) in a format approved by ACI, on a regular basis as determined by ACI; but in no event less than monthly; and (f) Customer acknowledges that the determination of ACI to transfer End User inquiries to customer will be made on a customer identification number-by-customer identification number basis and will include all inquiries related to any such customer identification number. For those inquires that ACI "warm transfers" to Customer, at all times ACI will attempt to complete the "warm transfer". However, Customer and ACI agree that if an End User does not want his/her/its inquiry to be transferred to Customer, ACI will handle the inquiry. (g) Notwithstanding anything above in this section to the contrary, ACI may, in its reasonable sole discretion and at any time, discontinue the transferring of End User inquiries to Customer if Customer fails to satisfactorily handle any End User inquiry. The transfer of End User inquiries to Customer does not abridge ACI's right to issue End User adjustments or credits in accordance with its established procedures. (iv) ACI handling of Inquiry Services, and Section (iii)(g) above, survive the term or termination of this Agreement. VIII. AUTHORIZATION Customer hereby authorizes ACI to include Customer's or Client's name, address, phone number, and any other information required by a LEC or Government Authority, that ACI deems reasonably necessary to discharge its duties and responsibilities under this Agreement. Customer agrees that it shall cause its Client(s), upon the signing of this Agreement, to provide an identical authorization to Customer for the services to be performed pursuant to this Agreement. Customer hereby ratifies and confirms all that ACI does in good faith to fulfill its duties and responsibilities hereunder. 5 IX. CUSTOMER REPRESENTATIONS, WARRANTIES AND OBLIGATIONS 9.1 CUSTOMER HEREBY REPRESENTS AND WARRANTS TO ACI AS FOLLOWS: a. Records submitted to ACI for billing strictly meet or adhere to the requirements of all federal, state, and local laws, rules, and regulations, and orders, and/or judgments of any Governmental Authority. In addition, Customer and each Client has filed all tariffs and has obtained all governmental and regulatory authorizations, approvals, and other consents, (collectively "Certification") all of which are in full force and effect, that are required by law or any Governmental Authority for the provision by Customer and each Client of telecommunications services to End Users, and/or required by any Government Authority having jurisdiction over the business and operations of Customer and each Client. Customer and each Client will, upon execution of this Agreement, provide ACI with a copy of each Certification or other written evidence of compliance with such requirements. Customer will promptly notify ACI in writing of any expiration, amendment, or renewal of any such Certification or of any new Certification. Customer and each Client will comply in all respects with the Certifications and laws, rules, regulations, and other requirements of any Governmental Authority related thereto. b. Records submitted by Customer and each Client pursuant to this Agreement are not subject to any other valid or existing billing and collection agreement, and have not been billed previously, and will not be billed by any Person following submission to ACI. Customer and each Client agree that once any services contemplated herein have begun for an End User's account or for a particular location, until after the termination of this Agreement, Customer and each Client will not transfer that End User's account or location information to another billing and collections provider, and except for ACI, no other billing and collections provider will provide billing services for Customer and each Client to that End-User account. The provisions of the previous sentence do not apply if ACI is unable to provide services related to such records, or if ACI is unable to provide advanced funding for such records. c. Customer and each Client will comply with all rules and requirements of ACI as well as the LECs' in whose jurisdiction records are submitted for billing and collections. d. Customer and each Client agree to be bound by the Coalition to Ensure Responsible Billing ("CERB") Guidelines, found at www.cerb.org. e. Each record does not relate to services performed more than ninety (90) days prior to the date said record was received by ACI for processing. X. This Article X is intentionally left blank. XI. INDEMNITY a. Customer will indemnify, and defend ACI and will hold ACI harmless from and against any and all claims, actions, acts of third parties, liabilities, litigations, losses, costs, expenses (including but not limited to attorney's fees whether in-house or outside), all damages (including but not limited to consequential and/or punitive damages, and/or damages for loss of profits and/or for loss of revenue), and liability for any equitable remedies (including but not limited to injunctive relief and/or specific performance), due to, relating to, or arising out of: (i) records processed on behalf of Customer and each Client, and/or (ii) any acts or omissions of Customer and each Client, and/or (iii) the occurrence of any of the items set forth in Section 13.2 of this Agreement, and/or (iv) any violation of any representation, covenant or warranty of Customer set forth in this Agreement, or any other Agreement between Customer and ACI, and/or (v) any breach by Customer of any provision of this Agreement or any other agreement 6 between ACI and Customer, and/or (vi) the incorrectness or incompleteness of any data or information supplied to ACI by Customer and each Client under this Agreement, and/or (vii) ACI's use, in accordance with this Agreement, of, and reliance upon, information provided by Customer and each Client. b. ACI will give Customer prompt written notice of any matters in respect of which the indemnity may apply; provided, however, that if ACI fails to give the Customer prompt written notice, Customer will only be relieved of its obligations under this Article XI if and to the extent that such party is prejudiced thereby. If ACI is named by a third party in a legal proceeding resulting from Customer's records, acts or omissions pursuant to this Agreement, ACI shall, due to ACI's expertise in the billing industry, solely control its own defense and Customer shall be liable for all costs and expenses including attorneys' fees. ACI shall provide Customer with invoices of actual costs and expenses incurred on a monthly basis, prior to deducting such costs and expenses from Disbursements. Should deductions from Disbursements be insufficient, ACI shall invoice Customer for sums due and such invoice shall be due. XII. LIMITATION OF LIABILITY 12.1 LIMITATION OF LIABILITY a. Correction of Errors. ACI will use its best efforts to correct any alleged acts or omissions in a timely fashion upon written notice from Customer, although ACI shall not be liable for specific performance or in any other way become liable to Customer for any of the acts, omissions or losses stated above as a result of its correction efforts. In this regard, ACI will reprocess or resubmit records, recalculate sums receivable or payable, or refile returns as needed, but only if commercially reasonable to do so and if permitted by a Governmental Authority or LEC (but not more than once as to each such corrective action), but ACI does not guarantee its correction effort, nor does ACI represent or warrant that all acts or omissions as described above will be corrected. Customer agrees that its sole remedy for any of the above referenced acts or omissions or losses shall be limited to the corrective actions described herein. b. Remedy for Gross Negligence. CUSTOMER FURTHER AGREES THAT IN THE EVENT OF GROSS NEGLIGENCE ON THE PART OF ACI, THE TOTAL AMOUNT OF DAMAGES FOR ALL PURPOSES, WILL NOT EXCEED, IN THE AGGREGATE, AN AMOUNT EQUAL ONLY TO THE TOTAL ACI PROCESSING FEE SET FORTH IN THE SCHEDULE(S) ONLY (SPECIFICALLY EXCLUDING, FOR EXAMPLE, LEC FEES, ETC.) PAID TO ACI DURING THE THREE MONTH PERIOD IMMEDIATELY PRECEDING THE OCCURRENCE OF THE EVENT, ACT OR OMISSION GIVING RISE TO THE CLAIM. The limitations set forth in the previous sentence does not apply to Disbursements payable to Customer. Any action or claim by Customer for gross negligence must be made within one (1) year of the event, act or omission giving rise to such claim or reasonable discovery of such. c. NOTWITHSTANDING ANY OTHER PROVISONS OF THIS AGREEMENT TO THE CONTRARY, AND REGARDLESS OF THE FORM OF CLAIM, INCLUDING BUT NOT LIMITED TO WHETHER IN CONTRACT OR IN TORT OR WHETHER FROM BREACH OF THIS AGREEMENT, IRRESPECTIVE OF WHETHER ACI HAS BEEN ADVISED OR SHOULD BE AWARE OF THE POSSIBILITY OF SUCH DAMAGES, IN NO EVENT WILL THE MEASURE OF DAMAGES RECOVERABLE BY CUSTOMER AGAINST ACI FOR ANY ACT OR OMMISSION OF ACI, INCLUDE ANY AMOUNTS FOR INDIRECT, INCIDENTAL, CONSEQUENTIAL, EXEMPLARY OR PUNITIVE DAMAGES OF ANY PERSON OR FOR LOSS OF ACTUAL OR ANTICIPATED PROFITS LOST SAVINGS OR OTHER ECONOMIC LOSS OF ANY PERSON OR FOR DAMAGES THAT COULD HAVE BEEN AVOIDED, USING REASONABLE DILIGENCE, BY ACI, AND IN NO EVENT SHALL CUSTOMER RECOVER DAMAGES AGAINST ACI FOR NEGLIGENCE. d. EXCEPT AS OTHERWISE EXPRESSLY PROVIDED IN THIS AGREEMENT, ACI MAKES NO REPRESENTATIONS OR WARRANTIES, EXPRESSED OR IMPLIED, TO CUSTOMER, TO ANY CLIENT OR TO ANY OTHER PERSON, INCLUDING WITHOUT LIMITATION ANY 7 WARRANTIES REGARDING TITLE TO OR THE MERCHANTABILITY, SUITABILITY, ORIGINALITY, FITNESS FOR A PARTICULAR PURPOSE, OR OTHERWISE (IRRESPECTIVE OF ANY PREVIOUS COURSE OF DEALING BETWEEN THE PARTIES OR CUSTOM OR USAGE OF TRADE) OF ANY SOFTWARE, SERVICES, OR MATERIALS PROVIDED UNDER THIS AGREEMENT. e. Hold Harmless and Indemnity. Customer and ACI expressly acknowledge that ACI's limited liability described above represents the express understanding of how the risks and liabilities between Customer and ACI are to be allocated. The parties reached this understanding by weighing the fees charged by ACI for its services under this Agreement against the recovery that Customer would be entitled to in the event that any of the acts, omissions or losses described above were to occur. Each party irrevocably accepts such limitations. XIII. TERMINATION 13.1 TERMINATION FOR CAUSE Subject to Section 13.3, if either party materially or repeatedly defaults in the performance of any of its duties or obligations under this Agreement, which default is not substantially cured within twenty (20) business days after written notice is given to the defaulting party specifying the default, or a lesser time period if set forth in another section of this Agreement, then the non-defaulting party may, by giving written notice thereof to the defaulting party, terminate this Agreement as of the date of receipt by the defaulting party of such notice or as of a future date specified in such notice of termination. 13.2 SPECIAL TERMINATION RIGHTS Without notice, ACI may stop processing all or some of the records submitted by Customer, or terminate the Agreement, if ACI determines in its sole discretion that the processing of records submitted by Customer, or the continuation of the processing of records, in whole or in part, has or shall: (a) negatively affect the goodwill, reputation, profitability, or business of ACI, (b) threaten the termination of or negatively impact any LEC Contract of ACI or ACI's relationship with a LEC, (c) result in or has already resulted in the scrutiny (informal or formal investigation, or otherwise) of Customer, ACI, or any Person, by any Governmental Authority, (d) has resulted in or may result in the violation of any rule, ordinance, law, order, decision, judgment, or policy of any Government Authority, any LEC and/or ACI, and/or (e) has resulted in or may result in a legal proceeding, including but not limited to litigation, arbitration or administrative proceeding involving ACI either as a party or as a non-party (including, but not limited to, ACI having to provide documents and/or deponents). ACI shall attempt to give notice and opportunity to cure to Customer in any of the above instances, if in ACI's sole reasonable discretion such notice and opportunity is proper under the circumstances. 13.3 RIGHTS UPON TERMINATION Records received by ACI on or before the expiration date or the effective date of termination of this Agreement will be processed by ACI, and Disbursements due and owing to Customer will be paid to Customer, less amounts representing the Reserve. Upon expiration or termination of this Agreement for any reason, Customer will (a) promptly return the Licensed Program (including the related documentation) to ACI and destroy all copies, whether authorized or unauthorized, in Customer's possession, and (b) pay ACI for all services provided and expenses incurred through the effective date of such expiration or termination, as well as for all services provided and expenses incurred thereafter in connection with the processing of records received on or before the effective date of such expiration or termination. The provisions of this Section 13.3, and Sections 5.1, 5.2, 7.1, 7.2 and Articles VI, XII, and XIII of the main 8 Agreement, Articles III, VII, XI, XII, XVII, and XVIII of this Attachment, any provision dealing with monies owed to ACI, and any provisions dealing with Disbursements owed, but not yet paid to Customer, survive the expiration or termination of this Agreement for any reason. XIV. FORCE MAJEURE Each party will be excused from performance under this Agreement for any period, and the time of any performance will be extended, to the extent reasonably necessary under the circumstances, any act of God or any Governmental Authority or any outbreak or escalation of hostilities, war, civil disturbance, court order, labor dispute, third party nonperformance (including without limitation the acts or omissions of common carriers, interexchange carriers or LECs, but excluding any employees of the party seeking to be excused from performance hereunder) or any other cause beyond its reasonable control, including without limitation failures or fluctuations in electrical power, heat, light, air conditioning or telecommunications equipment or lines or other equipment. Such nonperformance on the part of either party will not be considered: (a) a default under this Agreement, provided that the party whose performance has been excused performs such obligation as soon as is reasonably practicable after the termination or cessation of such event or circumstance; or (b) a ground for termination of this Agreement except as provided in Section 13.3 of this Attachment. XV. This Article XV is intentionally left blank. XVI. VALIDATION OBLIGATIONS During the Term, Customer and Client will validate, or cause to be validated, using an industry approved method for validation: (a) All telephone calls for which validation is mandated by a Governmental Authority; (b) All telephone calls for which validation is specifically required by a LEC; (c) All telephone calls, the collection for which is deemed to be below industry standards or not in accordance with industry practice; and (d) for 0+/- calls only (see Schedule 1-A) all operator assisted third-party calls (whether automated or assisted by telephone operator), collect calls, telephone calling cards, and person to person calls. XVII. ACI SOFTWARE For the purposes of this Agreement, "Software" means: (a) computer programs, including without limitation software, application programs, operating systems, files, and utilities; (b) supporting documentation for such computer programs, including without limitation input and output formats, program listings, narrative descriptions, and operating instructions; and (c) the tangible media upon which such programs and documentation are recorded, including without limitation hard copy, tapes, and disks. The ACI Software, including ACI's proprietary software PROACT(R), any developments, improvements, modifications, additions, or enhancements made by or for ACI to any ACI Software and any new Software developed or created by or for ACI pursuant to this Agreement will be and will remain solely ACI's property, as appropriate. Neither Customer nor any Client will have ownership rights or other rights to any of such items, except as expressly set forth in the notice accompanying such items, which provisions Customer agrees to comply. 9 XVIII. ACCESS AND COMMUNICATIONS SYSTEM In connection with the provision of services by ACI pursuant to this Agreement, ACI shall provide Customer with access to ACI's system for the purpose of electronically transmitting certain data to ACI and otherwise communicating electronically with ACI (the "System"), and Customer is required to use such System. Customer will comply with the terms and conditions relating to such access, as set forth in ACI's policies, including but not limited to protecting passwords, keeping information confidential, and being solely responsible for obtaining the necessary equipment to utilize the system, and utilizing the system in conformity with the provisions of this Agreement. XIX. ACKNOWLEDGMENT AND AGREEMENT This Attachment 1 is acknowledged and agreed to by Customer. EPIXTAR FINANCIAL CORP. WDR 10/15/02 - -------------------------------- -------------------------------- Customer's Initials Date 10 Exhibit A to Attachment 1 to the Billing Services Agreement Certain Fees and Expenses 1). Customer Service Inquiry Fees. Customer is charged a Customer Service Inquiry Fee of $3.25 for each inquiry handled by ACI's Customer Service Department, in addition to any LEC fees. The fee for the transfer of inquiry, as set forth in Article VII (iii), is $0.65 per inquiry transferred, plus any LEC fees. 2). Regulatory Inquiry Costs. Customer is charged for the time and processing costs involved in responding to regulatory inquiries and complaints relating to Customer's or any Client's End Users at the rate of $65.00 per hour plus expenses, $50.00 minimum per complaint. 3). Special Reporting and Professional Services Customer is charged for the time and processing costs involved in responding to requests for special reports, documents or research, or for professional services, including but not limited to data processing, and training, at the rate of $150.00 per hour, plus expenses. This fee also applies to requests for documentation or materials to be produced in response to requests of Governmental Authorities pursuant to rules, orders or subpoenas. 4). Sub-Carrier Identification Code ("Sub-CIC") Sub-Carrier Identification Codes ("Sub-CIC") permits separate "name on bill" identification (branding). This is subject to regulatory requirements. The fee is $3,500 for each nationwide set-up per Sub-CIC. So long as during the sixth month after a Sub-CIC is implemented, the revenue for records processed by ACI for that Sub-CIC exceeds $750,000, this fee is waived. Otherwise, Customer will be assessed this fee. 5). Customer Identification Number ("CIN"). CIN permits separate accounting for specific customer entities, locations, products, etc. This requires average monthly billable message volume of 10,000 per CIN. There is no charge for the first two CINs issued to Customer (one processing, one non-processing). The charge is $100 per additional CIN. So long as during the sixth month after a CIN is implemented, the revenue for records processed by ACI under that CIN exceeds $750,000, this fee is waived. Otherwise Customer will be assessed this fee. 6). Data Transmission Fees. Customer is responsible for all charges attributed to the transmission of data between ACI and the Customer and each Client, as the case may be and ACI and the LECs. This fee is $0.0048 per record, subject to change on sixty (60) days written notice. In addition, Customer is responsible for the acquisition and provision of any equipment including, without limitation, terminals, printers and modems (but excluding any data telecommunication lines or equipment at or between any ACI data centers), that are necessary or appropriate for Customer to access Customer data at any ACI data center. Customer is solely responsible for entering into arrangments with data telecommunication network carriers for the provision of access to such networks and pay any usage costs or charges relating thereto, as may be necessary or appropriate for Customer to access Customer data at any ACI data center. 11 7). Reimbursement of Expenses. In addition to any other payments specified in this Agreement, Customer will pay, or reimburse ACI for, all actual out-of-pocket costs and expenses, including without limitation travel and travel-related expenses, incurred by ACI in connection with the performance of its obligations under this Agreement. ACI will attempt to obtain from the Customer prior consent, except if such expense is needed to continue the processing of records. 8). Other Expenses. Customer will pay all fees and expenses of ACI for reruns or otherwise necessitated: (a) by incorrect, incomplete, or omitted data or erroneous instructions supplied to ACI by or through Customer or any Client; and/or (b) for the correction of programming, operator, and other processing errors caused by Customer, any Client, or its respective employees or agents. 9). Cost of Living Adjustment. If the Consumer Price Index for All Urban Consumers, All Cities Average, 1982-84=100, as published by the Bureau of Labor Statistics of the Department of Labor (the "CPI"), is on January 1 of any year during the Term (the "Current Index") higher than the highest CPI on January 1 of any prior year during the Term (the "Base Index"), then, effective as of such January 1, all fees payable to ACI pursuant to this Agreement, (except LEC fees), may be increased thereafter by the percentage that the Current Index will have increased from the Base Index, and such amounts as increased pursuant to this Section 9 will be deemed incorporated herein. If the Bureau of Labor Statistics stops publishing the CPI or substantially changes the content or format thereof, the parties will substitute therefor another comparable measure published by a mutually agreeable source; provided, however, that if such change is merely to redefine the base year for the CPI from 1982-84 to some other year(s), the parties will continue to use the CPI but will, if necessary, convert either the Base Index or the Current Index to the Same basis as the other by multiplying such Index by the appropriate conversion factor. 10). Invoice and Time of Payment. Any amount due ACI pursuant to this Agreement for which a time for payment is not otherwise specified will be due and payable upon receipt by Customer of the invoice from ACI therefor. All invoiced amounts due ACI pursuant to, and not paid in accordance with, this Agreement may be deducted by ACI from the Remittances it receives from the LECs prior to forwarding the Disbursements to Customer. Any amount owing to ACI pursuant to this Agreement that is not paid within fifteen (15) days of receipt will thereafter earn interest until paid at the Late Payment Rate. The "Late Payment Rate" means an annual rate of interest equal to the lesser of (a) 4% per annum more than the then prime rate established by Citibank N.A., New York, NY, or (b) the maximum rate of interest allowed by applicable law. 11). Customer Initiated Credits. For each End User adjustment or credit initiated by Customer, Customer shall be charged $0.55 for each such adjustment or credit. 12 Schedule 1-A to Attachment 1 Service Fees for 1+, 0+, SSM, and Enhanced Records 1). For purposes of this Schedule 1-A to Attachment 1: a. "1+ Records" means either: (i) "1+ Presubsribed", which means telephone calls placed via a preferred interexhange carrier by dialing the digit "1" immediately followed by the called area code and telephone number and charged to the originating telephone number; or (ii) "1+ Casual" calls mean telephone calls placed by dialing the prefix "1010xxx" immediately followed by the digit "1" and the called telephone number and charged to the originating telephone number. b. "0+/- Records" means: (a) telephone calls which are completed either: (i) by dialing the digit "0" immediately followed by the called area code (if required) and telephone number combination and charged to a telephone company calling card, collect to the called party, or a third party telephone number or (ii) by dialing the digit "0" or "00" to secure live telephone operator assistance for call completion, or (b) a call charged to a calling card or credit card. 2). a. ACI Processing Fees for 1+, Prescribed, 1+ Casual and 0+/- records on a monthly basis are as follows: BCDRs Per Month 1+ Records 0+/- Records --------------- ---------- ------------ First 250,000 $0.0490 $0.090 Next 250,000 $0.0420 $0.065 Next 500,000 $0.0280 $0.045 Next 1,000,000 $0.0250 $0.040 Next 1,000,000 $0.0210 $0.035 Over 3,000,000 $0.0190 $0.035 3). Special Service Message Fee. a. In addition to the above fee, there may be a fee for Special Service Messages ("SSM"). SSMs are non-transport charges related to toll charges, such as, for example, monthly services charges and Universal Service Fund Charges. b. SSM fees will apply to all such BCDRs. This fee will be as follows: 13 - -------------------------------------------------------------------------------- Special Services Messaging Processing Fees - -------------------------------------------------------------------------------- Average End User Charge Per Message Per Message Fee $00.01 - 10.00 1.5% $10.01 - 20.00 2.0% $20.01 - 30.00 2.5% $30.01+ Fee to be established by ACI on an individual case basis - -------------------------------------------------------------------------------- c. l. There are also fees for the implementation of SSM. These are as follows: - -------------------------------------------------------------------------------- Special Services Messaging Implementation Fees - -------------------------------------------------------------------------------- If implementation occurs for $1,000 for the first phrase multiple phrases simultaneously $500 for each additional - -------------------------------------------------------------------------------- If implementation for multiple $1,000 each phrase phrases does not occur simultaneously - -------------------------------------------------------------------------------- 2. So long as during the sixth month after a text phrase or text code is implemented the revenue for records processed by ACI under a particular text phrase or text code exceeds $750,000, the implementation fees for text phrases or codes set forth in this Section 3(c)(2)are waived. Otherwise, Customer will be assessed these fees. 4). a. To the extent authorized by ACI and the LECs, Customer is authorized to submit non-toll related BCDRs ("Enhanced Records") to ACI for billing and collection. b. ACI's processing fees for billing and collecting Enhanced Records are based on the average value of such records accepted during a calendar month and are detailed as follows: - -------------------------------------------------------------------------------- Enhanced Services Processing Fees - -------------------------------------------------------------------------------- Average End User Charge Per Message Per Message Fee $00.01 - 10.00 $.12 $10.01 - 20.00 1.7% $20.01 - 30.00 2.0% $30.01 - 40.00 2.4% $40.01 - 50.00 2.8% $50.01+ Fee to be established by ACI on an individual case basis - -------------------------------------------------------------------------------- c. There are also fees for the implementation of Enhanced Services Processing Fees. These are as follows: - -------------------------------------------------------------------------------- Enhanced Services Processing Implementation Fees - -------------------------------------------------------------------------------- If implementation occurs for multiple phrases $1,000 for the first phrase - -------------------------------------------------------------------------------- 14 - ------------------------------------------------------------------------------- simultaneously $500 for each additional - -------------------------------------------------------------------------------- If implementation for multiple $1,000 each phrase phrases does not occur simultaneously - -------------------------------------------------------------------------------- So long as during the sixth month after a text phrase or text code is implemented the revenue for records processed by ACI under a particular text phrase or text code exceeds $750,000, the implementation fees for text phrases or codes set forth in this Section 4(c) of Schedule 1-A are waived. Otherwise, Customer will be assessed these fees. d. For billing in Qwest territory for Enhanced Services, the following fees for required implementation and processing of taxes are as follows: Initial set-up: $2,000.00. Monthly Processing Fee: $750.00 per month. 5). LEC Fees. ACI processing fees noted in Section 2, 3 and 4 above, are in addition to the Data Transmission Fee noted in Section 6 of Exhibit A (currently $0.0048 per record) and LEC Fees. ACI will make the then current LEC fees available to Customer upon request. ACI LEC fees are subject to change. The LEC fee for 0+/- Records is calculated based on the average LEC fee for all 0+/- ACI customers during a calendar month for each LEC. The LEC fee for 1+ Records is calculated based on the average number of End User bill pages needed to bill Customer's records during a calendar month for each LEC. The LEC fee for Enhanced Records is calculated based on the average number of End-User bill pages needed to bill Customer's records during a calendar month for each LEC. The LEC fee for SSM Records is determined based on the type of BCDR that caused the SSM charge to be generated. Notwithstanding anything to the contrary, in no event will the LEC charges to Customer be less than the fee paid by ACI to the LECs. 6). All processing fees are calculated on the total number of records processed in a calendar month. 7). Starting as of the first date of the Initial Term of this Agreement, the minimum processing fees only (those fees set forth in Sections 2(a) and 3(b) and 4(b) above of this Schedule 1-A only) (the "Processing Fee") owed to ACI by Customer during a calendar month shall be $5,000. Should the Processing Fee be less than $5,000 in a calendar month, Customer shall have deducted from Disbursements, and/or pay directly after invoice to ACI, the short fall. 8). Canadian Billed Records. In addition to the foregoing charges, Customer will pay ACI an additional charge of $0.03 for each BCDR that is billed in Canada. 15 This Schedule 1-A to Attachment l is acknowledged and agreed to by Customer. EPIXTAR FINANCIAL CORP. WDR 10/15/02 - ------------------------------------- ---------------------------------- Customer's Initials Date 16 -----END PRIVACY-ENHANCED MESSAGE-----