Traffix, Inc.

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Traffix, Inc.

1 Blue Hill Plaza
Pearl River, New York 10965
U.S.A.
Telephone (845) 620-1212
Fax: (845) 620-1717
Web site: http://www.traffixinc.com

Public Company
Incorporated: 1993 as U.S. Teleconnect
Employees: 47
Sales: $44.04 million (2002)
Stock Exchanges: NASDAQ
Ticker Symbol: TRFX
NAIC: 517910 Other Telecommunications

Traffix, Inc. is a Pearl River, New York-based online database marketing company, operating a media network of web sites, interactive games, and e-mail marketing to generate leads, customers, and sales for both itself and clients. Traffix offers a range of online marketing solutions and possesses the ability to develop a creative program, promote it, and then capture information on participants to form a database of potential customers for corporate clients. The company's online properties include GroupLotto.com, a free daily lottery; AtlasCreditGroup.com., a sweepstakes that awards $1 million in a credit line that does not need to be repaid; AtlasAutomotiveGroup.com, a sweepstakes that gives winners $50,000 to be used in the purchase of a luxury car; PrizeAmerica.com, a "scratch and win" game featuring a maximum prize of $25,000; iMatchup.com, a free online dating site; TakeOneEntertainment.com, a site that offers free CDs; and prizeCade.com, a site that offers a variety of games and awards prizes to high-scoring participants. In order to use these sites, participants are required to provide demographic information and are also asked if they are interested in the products and services available from Traffix's clients. Traffix is also involved in e-mail marketing, a direct marketing effort that takes advantage of the widespread use of e-mail. Campaigns that prove to be successful may then be syndicated for use by third parties. A more recent development is the introduction of a business unit devoted to using the company's expertise to market its own proprietary products and services.

Formation of Company: 1993

Traffix's current chairman and chief executive officer, Jeffrey L. Schwartz, along with partner Jay Greenwald, founded Traffix in 1993 under the name of U.S. Teleconnect. Schwartz already had some 20 years of experience in direct marketing. In the early 1970s, after graduating from college, Schwartz became involved in the direct marketing of computer services. In 1979 he and Michael G. Miller founded Jami Marketing Services, Inc., a list brokerage and list management consulting firm. They also established Jami Data Services, Inc. to manage the resulting databases and Jami Direct to produce direct mail items. In the late 1980s Jami Marketing began to exploit the new telephone entertainment services developed by regional carriers as a way to boost phone usage. Mostly these numbers provided time and weather checks. When long-distance carriers entered the field in the late 1980s, many entrepreneurs recognized an opportunity to provide telephone entertainment via "900" numbers to a national, and in some cases international, audience. Jami Marketing took advantage of the trend by gathering the names of callers from such 900 phone numbers as "Love Lines Dating and Fantasy." In the early 1990s, Schwartz teamed with Greenwald to launch a new business to exploit the popularity of 900 numbers. In his mid-20s, Greenwald had far less seasoning than Schwartz, but already had experience in direct-response marketing, serving in top capacities at Newald Marketing, Inc. and Newald Direct, Inc. The two men identified the "New Age" product market as an opportunity and in November 1993 incorporated U.S. Teleconnect, which actually began operations in August 1992.

In 1994 U.S. Teleconnect introduced its first "club," the Astrological Society of America. Participants could receive a newsletter and deck of tarot cards and one month's membership for free, after which they were charged $9.95 a month on their phone bill if they wanted to join. The primary business of the Astrological Society of America, however, was the selling of live conversations with purported psychics, who acted as independent contractors. The company was careful to bill this service as pure entertainment and to stay within the bounds of the law, but there was little doubt that the primary customers—mostly low income, poorly educated, and female—turned to telephone psychics in hopes of finding authentic comfort and advice. While they may have received several "free" minutes, they were billed as much as $4.99 per minute for additional time they spent on the phone with the psychic, who received a bonus for keeping callers on the line and had a vested interest in maximizing the length of the "reading." The money realized from the 900 calls were just half of the equation, of course. Before the reading took place, the psychics asked for the name, address, and telephone number of the caller. This information would then be fed into the U.S. Teleconnect databases and the resulting lists sold to outside companies, who would then inundate the callers with junk mail and telemarketing calls. Defenders of the psychic hotline concept saw the service as simply filling a need, acting in effect as "a poor man's therapist."

In 1995 U.S. Teleconnect formed a joint venture called New Lauderdale L.L.C., a successor to a joint venture created in 1994 with Psychic Readers Network Inc. (PRN), the company which provided psychics to the Astrological Society of America. PRN was founded by Steven L. Feder, his business partner Thomas Lindsey, and his cousin Peter Stolz in Fort Lauderdale, Florida. It would become better known later in the 1990s because of its popular spokeswoman, Miss Cleo, and her often parodied speaking style. Portraying herself as a Jamaican shaman, she was accused by some of employing an accent that was more in keeping with Ireland than Jamaica. In the end, she was revealed to be a Los Angeles–born actress named Youree Dell Harris, whose only career success before creating the persona of Miss Cleo was a role on the Miami Vice television series. In 2002 PRN and sister company Access Resource Services Inc. were fined $5 million by the Federal Trade Commission and forced to cancel $500 million in billings.) New Lauderdale created four telephone entertainment networks in 1995: a Spanish version of the Astrological Society of America called La Sociedad Astrologica de America; The Philip Michael Thomas Membership Network, a psychic telephone service that relied on infomercials hosted by Harris; The Joyce Jillson Astrology Network, which traded on the name of a former actress who was better known as Ronald Reagan's astrologer; and Psychic Enrichment Network.

Business Taken Public in 1995

U.S. Teleconnect, as well as the entire 900 telephone industry, experienced strong growth that caught the attention of investors. The company posted revenues of $8.3 million in 1993, $22.8 million in 1994, and more than $50.5 million in 1995. Net income during this period grew from $714,901 in 1993 to more than $13 million in 1995. Late in 1995 the company was reorganized with sister companies Creative Direct Marketing, Inc. and Calling Card Co. brought into the fold of what now became known as Quintel Entertainment, Inc. Quintel was then taken public in December 1995, its $15.2 million offering underwritten by Whale Securities Co. L.P. Initially priced at $5 per share, Quintel stock began trading on the NASDAQ.

Quintel bought out PRN's 50 percent interest in New Lauderdale in 1996, thus acquiring all the revenues generated by these ventures, plus gaining commercial and infomercial production capabilities and a media buying operation. Aside from income derived from telephone services and the sale of customers' names, Quintel also began to exploit its 30-millionperson database to sell such merchandise as music videos, hair care products, basic voice mail services, and prepaid cellular service to people rejected for traditional cellular service. Another major development in 1996 was a deal struck with AT&T, whereby it would be paid from $50 to $70 for each person in its database that it was able to convince to use AT&T for longdistance service. For fiscal 1996 the company continued to experience strong gains in revenues, which totaled more than $86 million, along with profits of $12.2 million.

As a result of the New Lauderdale acquisition and the AT&T alliance, Quintel enjoyed record results in fiscal 1997. Revenues improved by 121 percent to $191.4 million. Of this amount nearly $95 million was attributed to New Lauderdale and $26.3 million to AT&T. Net income improved by a more modest amount, 18 percent, totaling $14.4 million. But this would prove to be the high-water mark for Quintel. Late in fiscal 1997 AT&T modified its tactics, which greatly hindered Quintel's ability to market AT&T's long-distance products. Quintel began to pull back and during the first quarter of fiscal 1998 terminated the agreement. In the meantime, the company's 900 telephone entertainment services were hit hard by significant increases in the cost to market them. Because so many customers disputed their bills, telephone carriers were charging Quintel 50 cents for every dollar the company earned in gross revenues. With margins severely eroded, Quintel began to take steps to move away from the business that had been at its core. In fiscal 1998, Quintel saw revenues drop to less than $95 million, while recording a net loss of nearly $17 million. The loss was due to special charges of $19.7 million, of which $18.5 million was a goodwill writedown connected to the New Lauderdale acquisition and another $1.2 million in asset writedowns related to the development and test marketing of an Internet telephony program.

Company Perspectives:

We are a leading on-line database marketing company that uses our on-line media network to generate leads, customers and sales for us, and our corporate clients.

In keeping with an effort to shift the company's focus from entertainment products to telecommunications products and services, Quintel changed its name to Quintel Communications, Inc. in August 1998. During the course of fiscal 1999, the company initiated cost-cutting measures that brought relief to the bottom line of its balance sheet. Although revenues dipped below $43 million, Quintel was able to record a profit of nearly $4 million for the year, and had some $38 million in cash and other assets at its disposal for transforming the company. As the fiscal year came to a close in November 1999, Quintel took significant steps to reposition itself, looking to take advantage of the Internet rather than the telephone. It formed a subsidiary named MultiBuyer, Inc., an Internet consumer direct marketing operation. A day after Quintel announced the creation of MultiBuyer, the new unit announced the establishment of GroupLotto.com, which initially offered a daily grand prize of $1 million. Should the number of entries exceed 10,000, however, the prize automatically grew to $2 million. Participants could also earn additional entries by bringing in new players. What the free lottery was accomplishing for the Quintel operation was drumming up new entries for its direct marketing database.

Adoption of Traffix Name: 2000

To reinforce the company's change in focus, Quintel became Traffix, Inc. in October 2000. Schwartz told the Journal News (Westchester, New York) that the company did not use professionals in coining its new name. Rather, employees assembled a list of 50 to 100 possibilities, selecting Traffix with Alkemy coming in as the runner-up. Schwartz explained that the name referred to the company's new business of directing traffic to web sites, in keeping with a new slogan: "Performance Marketing for the New Economy." Other developments in 2000 included the creation of Quintel Email Inc., the company's e-mail marketing service. While undergoing its transformation into an Internet-oriented business, Traffix continued to experience declining revenues in fiscal 2000. Although revenues fell to $26.6 million for the year, the company was able to post a net profit in excess of $5.1 million.

Over the next three years Traffix launched its current slate of web sites, intended to build the company's database of names, addresses, and telephone numbers to be exploited for direct marketing efforts. In December 2001 Traffix paid $1 million to acquire InfiKnowledge, Inc., a video game maker. In addition to an e-mail delivery system and a suite of Internet games that could be used for direct marketing purposes, Traffix received a team of some 30 video game and Web developers. In that same month, Traffix also spent approximately $675,000 acquiring ThanksMuch.Com LLC, a company that specialized in the online marketing of costume jewelry and other small gift items. Revenues improved to $32.2 million in fiscal 2001 and more than $44 million in fiscal 2002, while net income dropped to $417,500 in 2001 and rebounded to $2.74 million in 2002. Although online advertising had experienced some difficult times in the aftermath of the dotcom meltdown and poor economic conditions in general, Traffix carried on with its plans, launching iMatchup.com and other ventures, yet managing to stay profitable. While the technology platform may have changed, the company Schwartz founded remained very much a direct marketing enterprise, whose function was to gather and exploit sales leads. With some 30 years of experience in the business, Schwartz clearly knew how to make the most of the opportunities that the Internet had to offer.

Key Dates:

1993:: U.S. Teleconnect is incorporated.
1995:: Company goes public as Quintel Entertainment, Inc.
1998:: Name is changed to Quintel Communications, Inc.
2000:: Traffix, Inc. is adopted as the corporate name.
2001:: InfiKnowledge is acquired.

Principal Subsidiaries

GroupLotto, Inc.; MultiBuyer, Inc.; Quintel E-Mail, Inc.; New Lauderdale, L.L.C.; Creative Direct Marketing, Inc.; InfiKnowledge, ULC; Atlast Sites, Inc.; iMatchup.com, Inc.