Opinion on  Brookside Technology Holdings Corp. (BKSD)
Brookside Technology Holdings Corp.

Brookside Technology Holdings Corp (OTC BB: BKSD) is a leading provider of global managed communication services. The Company specializes in providing converged turnkey voice and data solutions for businesses and government agencies. Through its wholly-owned subsidiaries, Brookside designs, sells and implements converged Voice-over-Internet Protocol (VoIP), data, video and Wireless (Wi-Fi) business communications solutions.

Brookside is a holding company for Brookside Technology Partners and US Voice & Data. Brookside Technology Partners Inc. specializes in selling and implementing converged VoIP, data and wireless business communication solutions. The Company not only designs system infrastructures for its clients, but also deploys the technology and provides on-going managed services and system support. In September 2007, Brookside acquired Kentucky-based US Voice & Data, LLC (USVD), a leading regional provider of telecommunications services. During the 12 months ended August 31, 2007, USVD generated revenues of approximately $15.3 million. USVD is one of NEC’s fastest-growing business partners and the nation’s 5th largest distributor of Inter-Tel products. The USDV acquisition is enabling Brookside to rapidly expand its customer base, leverage its service offerings and build a position as a leading national provider of turnkey converged voice and data services.

Brookside is an Authorized Nortel Premium Partner and an expert on Nortel products. The Company is one of a handful of vendors for Nortel’s Go DIRect program in Texas. This program allows local government agencies and school districts to by-pass the lengthy bid process for voice and data systems through an integrated product offering. In addition to its established relationships with NEC, Inter-Tel and Nortel, Brookside also has strategic partnerships with LifeSize, WatchGuard, SinglePoint Solutions, Datacom and Tamco. In October 2007, the Company signed an agreement with SinglePoint Solutions whereby Brookside will offer SinglePoint’s telecommunications consulting services as part of Brookside’s comprehensive suite of voice and data solutions. Through an October agreement with Datacom, Brookside is now able to offer Datacom Warranty Corporation’s Bronze Warranty™ services across each of Brookside’s subsidiary companies.

Brookside plans to capitalize on growing customer demand for nationally authorized distributors of converged VoIP systems and technologies by acquiring small and medium-sized telecom system distributors and re-marketers who can expand its growth opportunities in the emerging area of turnkey converged voice and data solutions.

Incorporated in 2005 and originally known as Cruisestock Inc., the Company acquired all of the stock of Brookside Technology Partners in February 2007 through a share exchange. As a result, Brookside Technology Partners became a wholly-owned subsidiary of the Company which changed its name to Brookside Technology Holdings Corp. in July 2007. Brookside shares trade over-the-counter under the ticker symbol BKSD.

Fast-growing market for converged VoIP services

Rising demand for ICE (information exchange, communications and entertainment) technology around the world is fueling growth in the VoIP market. The hottest areas involve converged technologies utilizing both VoIP and wireless technologies. IP telephony is very attractive to business users because of the cost savings and operating effectiveness they can realize by deploying these systems. Business spending on IP phone systems is estimated to exceed $4.0 billion in 2007. In addition, US revenues from enterprise voice and data equipment sales are expected to grow from $92 billion in 2004 to an estimated range of $127 billion by 2010.

Unique product/solutions portfolio enhances revenue opportunities

Brookside offers a comprehensive portfolio of products/solutions in VoIP, data, video and wireless technologies. The Company is already recognized as a leading VoIP product vendor and managed services provider, with over 300 enterprise- level installations completed. In addition to system design and implementation, Brookside provides ongoing system management and financing assistance through a strategic partner. As a result, Brookside is well-positioned to deliver the customized solutions corporate clients increasingly demand. Brookside is continuing to expand its geographic coverage, customer base and product offerings through strategic partnerships and acquisitions which target evolving turnkey voice and data system market opportunities.

Growth through synergistic acquisitions

The Company has a proven track record of acquiring profitable businesses at attractive valuations. Brookside is leveraging these acquisitions to expand its products and services, improve cross-selling opportunities and realize other operating synergies and economies of scale. For example, the USVD acquisition enhances the Company’s ability to up-sell products and services since some 75% of USVD customers are committed under long-term service contracts. The Company is also utilizing acquisitions to enhance its geographical coverage, increase its number of network operation centers and equipment repair/maintenance centers and improve operating efficiency.

Competitively priced solutions for small and mid-sized businesses

Brookside helps its customers maximize the value of their telecommunications dollars by providing turnkey solutions which integrate system design, equipment purchase and installation, training, maintenance and financing assistance. This turnkey approach helps businesses reduce their telecom costs, increase productivity and stream-line system deployment. The Company offers a unique financing program through a financing partner, Telecommunications Asset Management Company (TAMCO). In addition, Brookside offers its business customers leased solutions that enable them to upgrade existing systems at any time without incurring financial penalties or cancellation charges. By offering financing and leased solutions, Brookside is able to build brand recognition and customer loyalty.

Strategic alliances with leading equipment vendors

Brookside, through its USVD subsidiary, is one of NEC’s fastest-growing business partners, the nation’s 5th largest distributor of Inter-Tel equipment and one of a select few chosen to participate in Nortel’s GoDIRect Program in Texas. These relationships allow Brookside to offer a comprehensive product/solution suite accredited and certified by global telecom manufacturers and service providers. Brookside also offers warranty services through Datacom and financing assistance through TAMCO. Through these alliances, Brookside can provide a single source solution for addressing all of its customer’s telecom system needs.

Experienced Management

CEO Michael Nole has more than 18 years experience providing management consulting and business development services in the voice, data and wireless communications segment to small and mid-size companies. The Company’s President, George Pacinelli, has 25 years experience in the voice and data communications technology sector. He is also associated with Brookside’s financing partner, TAMCO.

VoIP services are poised for rapid growth as a result of established telecom service providers exploring new revenue streams, and software developers seeking to participate in VoIP growth as application market leaders. Although VoIP currently focuses primarily on voice services, VoIP offerings are expanding to include video telephony, video instant messaging, advanced call routing, games and Web-enabled ring tone features. Key VoIP industry growth drivers are shown in Exhibit 1.

Exhibit 1: Industry Growth Drivers

Source: Company reports

$700 billion worldwide wireless services segment

The global wireless telecommunication services market grew 12.1% in 2006 to $489.7 billion and is forecast to grow 36.8% to $669.9 billion by 2011. The number of wireless service subscribers worldwide is forecast to grow 54.8% to 2.7 billion subscribers ¹ .

VOIP market growth

Businesses are embracing VoIP telephony as an effective solution for minimizing communication costs and improving efficiency. The benefits of VoIP solutions include:

• Overall network cost savings
• Cost-effective solutions for remote users
• Shared infrastructure
• Relatively simple to use and deploy
• Improved inter-company communications

According to Radicati Group, corporate spending on VoIP deployment will rise from $1 billion in 2004 to $5.5 billion by 2008. One of the main reasons for the growing popularity of VoIP technology is declining costs; installation costs are forecast to decline to only about $75 to $600 per line in 2008 from costs of approximately $1,000 per line in 2004. The Radicati Group study also predicts that reduced equipment costs will fuel a jump in the number of corporate VoIP telephone lines to 44% by 2008 versus less than 10% in 2004. US revenues from enterprise voice and data equipment sales are forecast to grow from $92 billion in 2004 to $126.9 billion by 2010. The worldwide VoIP market is expected to grow 51.0% annually to 74.1 million subscribers by year-end 2009 ² .

Exhibit 2: US residential VoIP revenue ($ Millions)(left) and Enterprise voice and data equipment revenue in the US ($ Billions) (right)

Source: TIA’s 2007 Telecommunication Market Review and Forecast

Leveraging existing infrastructure

VoIP enables existing cable network operators to provide bundled services of video, voice and data. As a result, cable service providers have been able to attract thousands of new customers with their lower rates. Kagan Research estimates the cable network segment of the VoIP market grew from $670 million in 2005 to $3.75 billion in 2007.

1 Global Wireless Telecommunication Services - Datamonitor
2 Gartner’s July 2005 report “Forecast: Fixed Public Network Services, Worldwide, 2003-2009”

Brookside provides converged voice and data solutions for businesses of all sizes and types. The Company differentiates itself from competitors by its focus on assisting customers in controlling and reducing their overall cost of system deployment. This strategy, called Telefficiency™, offers overall savings for customers looking to migrate from and modernize outdated telecommunications systems and networks. Brookside achieves cost savings for its customers by combining technology, business and financial solutions.

The Company plans to further expand its product portfolio, market share and geographic coverage by acquiring small and medium-sized vendors of convergent VOIP solutions, including wholesalers and re-marketers of business telephone systems and telecommunications equipment. In September 2007, Brookside acquired telecom service provider US Voice & Data. USVD’s products and services include data, voice, paging, fiber optics, security and CCTV systems. This acquisition adds over $13 million to Brookside’s annualized revenues and also creates considerable opportunities to cross-sell its products and services to USVD’s large installed customer base. Approximately 75% of USVD’s customers have signed long-term maintenance contracts. The USDV acquisition also expands Brookside’s talent pool, product offerings and services and creates operating synergies and economies of scale.

In addition to grow through acquisitions, Brookside is fueling organic growth through strategic alliances with leading telecom equipment companies such as Nortel, Inter-Tel and AT&T. These relationships synergize its core expertise by giving Brookside access to the latest technological innovations. Brookside is an Authorized Nortel Premium Advantage Partner and the 5th largest distributor of Inter-Tel products. The Company recently formed a strategic alliance with SinglePoint Solutions and now offers SinglePoint’s telecom consulting services as part of its own service suite. The Company has also negotiated an expanded relationship with Datacom whereby it is now able to offer Datacom Warranty Corporation’s Bronze Warranty service across each of Brookside’s subsidiary companies. The Bronze Warranty includes coverage for mechanical defects as well as failures which occur as a result of natural or artificially occurring power surges.

• Nortel Premium Advantage Partner
  As one of Nortel’s Premium Advantage Partners, Brookside is able to leverage the skills of Nortel-certified system design and support professionals for pre-sales system design, implementation and project management. The Company also offers managed services and extended warranty agreements for Nortel equipment. Brookside is on the short list of vendors for Nortel’s “Go DIRect” (DIR) program in Texas, through which it provides government agencies and school districts with competitively priced products and the ability to streamline the cumbersome bidding process for voice and data systems.
• NEC Partner
  NEC is an industry leader in the design and manufacture of telecom systems for all types of businesses. Through the USVD acquisition, Brookside has become one of NEC’s fastest-growing business partners.
• Inter-Tel Partner
  Inter-Tel, a Mitel company, delivers technologically-advanced communications solutions for small and mid-sized businesses. Brookside is the 5th largest distributor of Inter-Tel equipment in the US. During the September 2007 quarter, Brookside enhanced its product offerings by entering into a new product distribution agreement with Inter-Tel to expand distribution of Inter-Tel 5000 and Mitel 3300 products throughout Austin and San Antonio.
• WatchGuard Expert Partner
  Through its partnership with WatchGuard, the Company provides reliable, easy-to-manage security applications for hundreds of businesses. Its WatchGuard Certified System Professionals (WCSP) deliver Firebox X unified threat management (UTM) solutions, combining strong, reliable, multi-layered security with best-in-class, ease-of-use. These solutions are also covered by LiveSecurity® Service, an excellent support and maintenance program.
• AT&T Solutions Provider
  Brookside provides services ranging from local service to high speed and reliable internet access to converged voice and data circuits over MPLS as an approved solutions provider for AT&T, the world’s largest communications company.

Brookside has also partnered with Datacom for warranty solutions and with Singlepoint for consulting solutions. Financing assistance is available to Brookside’s customers through its strategic alliance with financing partner, TAMCO.

USVD Acquisition

Founded in 1999, USVD provides high-quality communications products to customers in Kentucky and Indiana. USVD generated revenues estimated at $15.3 million in the twelve months ended August 31, 2007 and produced 2006 revenues of $12.1 million.

The September 2007 acquisition of USVD provides Brookside with expanded geographic coverage and product offerings as well as access to a talented group of telecom industry professionals. In addition, USVD produces high recurring revenues from long-term customer contracts and strong cash flow. The acquisition creates considerable opportunities for cross-selling Brookside products and services to USVD customers and is expected to be immediately accretive to Brookside’s earnings.

Revenue Strategy

The Company generates revenue primarily from:

• Sales of converged VOIP telecommunications, and data and wireless equipment and their implementation and installation;
• Professional services installation/implementation, recurring maintenance/ managed services;
• Network service agreements and other services;
• Datacom warranties; and
• State of Texas Department of Information Resources (DIR) contracts.

During the nine months ended September 30, 2007, equipment sales represented approximately 70% of revenues and installation and other services accounted for the remaining 30% of revenues. This compares to equipment sales that represented approximately 75% of revenues and installation and other services at 25% of revenues in the prior year nine-month period. The Company’s revenue mix may change in the future as Brookside acquires complementary businesses and additional products and services.

The Company markets it converged VoIP, data and video telecommunication solutions to clients based on its TelefficiencyTM program, which combines technology, business and financial solutions to reduce the client’s utilization costs and risks while increasing protection and flexibility through innovations such as leased solutions. The Company also hosts “Speak the Future” presentations where clients are updated on the latest technology innovations. The Company’s innovative marketing approach is helping it quickly build brand recognition and raise the technology IQ of existing and potential clients.

Brookside also offers a unique financing program called the ‘TAMCO Shield®. Specifically designed for growing businesses, TAMCO provides flexibility through leased solutions. It offers “$1 Out” and “Fair Market Value” leases, enabling existing clients to upgrade outdated systems without incurring financial penalties or cancellation charges.

Exhibit 3: Marketing strategy

Source: Company Reports

The Company’s goal is to become a leading national provider of turnkey converged VoIP, data and video telecommunication solutions. It expects to increase its geographic coverage, product offering and customer base, while realizing operating synergies, by acquiring small and medium-sized companies that provide point–of-sale, wireless ISP, data networking professional services, web development and hosting technologies and other related services. The Company anticipates it will gain a competitive edge through:

• Expanded products/ solutions offering
• A national market presence
• Product offerings compliant with accreditations and certifications
• An extensive network of Operation Centers
• Concentrated business focus
• Institutional training and development
• In-house product repair and refurbishment centers

These competitive advantages are expected to result in revenue and market share gains while enabling Brookside to benefit from operating efficiencies.

Exhibit 4: Growth strategy

Source: Company Reports

The Company offers a portfolio of products and solutions through its wholly- owned subsidiaries, Brookside Technology Partners and US Voice & Data.

Exhibit 5: Product Portfolio

Source: Company Reports

Brookside’s competitors in the converged voice and data solutions market include equipment manufacturers, professional service firms and hosted solution providers. A few such companies are described below:

Cogent Communications Group

Cogent Communications Group, Inc. provides Internet access and Internet Protocol, or communications services to small and medium-sized businesses, communications service providers, and other bandwidth-intensive organizations. It offers on-net services to customers in multi-tenant office buildings, such as law, financial services, advertising and marketing, and other professional services businesses, as well as to bandwidth-intensive users, such as universities, other ISPs, and commercial content providers. In addition, the company provides Internet connectivity to customers that are not located in buildings directly connected to the company’s network. Further, it offers managed modem, email, dial-up Internet, shared Web hosting, voice, managed Web hosting, managed security, and legacy point-to-point services. The company also operates data centers that allow customers to co-locate their equipment and access the company’s network. It markets its services through direct sales personnel and agents in North America and Europe. The company was founded in 1999 and is headquartered in Washington, D.C.

Vonage Holdings Corporation

Vonage provides broadband voice over Internet protocol services to residential and commercial customers primarily in the US, Canada and the UK. It provides broadband telephone services with advanced features such as area code selection, service and number portability, online account management and personalized Web-enabled voicemail. It also provides a software application, Vonage SoftPhone, which enables the use of a computer as a telephone. Further, the company offers Vonage-enabled devices such as analog telephone adapters, integrated adapters and routers, integrated cordless phones, WiFi phone - a pocket-sized wireless Internet phone - and V-phone - a USB compatible device. As of December 31, 2006, the company had approximately 2.2 million subscribers.

Verizon Communications Inc

The company provides a range of communication services worldwide. It‘s Wireline segment offers communications and information services, including basic telecommunication service and value-added services such as voicemail, caller ID and call forwarding. It also provides broadband services, which include digital subscriber lines and fiber optics to national and international long distance services and operator services. It markets voice, data, Internet communications services, private line, frame relay, ATM services, IP network services, as well as private IP, IP VPN, Web hosting, and voice over Internet protocol to retail customers, multi-national corporations and federal governments. Its Domestic Wireless segment offers a range of wireless voice and data services such as BroadbandAccess/ NationalAccess, text and picture messaging, V Cast, mobile Web, location-based services and wireless business solutions. The company, formerly known as Bell Atlantic Corporation, was founded in 1983.

Avaya Inc.

This company provides communication systems, applications, and services worldwide through two segments - Global Communications Solutions and Avaya Global Services. Its Global Communications Solutions segment provides Internet protocol (IP) telephony offerings such as Communication Manager, voice application software, media servers, media gateways, Session Initiation Protocol enablement services solution and a suite of management tools to support voice and data network infrastructure. It also provides contact center products as well as call-routing alternatives, modular messaging, multimedia conferencing, video and application enablement server platforms that support virtual teams, as well as IP Softphone with instant messaging, video, voice mail and traditional TDM telephones. The company’s Avaya Global Services segment offers business communications strategy development and planning, applications design and integration, migration to IP, secure communications networks, communications support and network monitoring.

Cisco Systems, Inc.

This company designs, manufactures, and markets Internet Protocol-based networking and other products relating to communications and information technology. It offers routers, switching systems, application networking solutions, home networking products, such as voice and data modems, network cards, media adapters, Internet video cameras, network storage, USB adapters and Cisco security solutions to protect information systems. It also provides storage area networking products, unified communication products and video systems. Cisco also provides cable access, service provider VoIP services, and optical networking products. It markets its products and services through its direct sales force, systems integrators, service providers, resellers, distributors, and retail partners.

Financial Record

The Company acquired Brookside Technology Partners Inc. in February 2007 and US Voice and Data in September 2007.

During the nine months ended September 30, 2007, the Company’s revenues (excluding any contribution from USVD) declined 30% year-over-year to $1.9 million from $2.8 million one year ago. However, Brookside recorded strong sequential revenue growth in the third quarter of 2007 compared to the second quarter of 2007 and a three-fold increase in installation and service revenues in the third quarter of 2007 as compared to the 2006 third quarter. Although third quarter 2007 equipment sales were lower, this was the result of deliberate actions taken by the Company in its South Central territory to shift its focus from one-time system sales to a sales process that emphasizes bundled product and service offerings, including long-term recurring warranty and maintenance contracts and converged equipment sales to both new and existing customers. Brookside hired several experienced sales people early in the third quarter whose contributions will enhance the strength of the new business pipeline.

Exhibit 6: Selected income statement data (excludes USVD contribution)

Source: Company Reports

Because the USVD acquisition was completed in this year’s third quarter, it did not meaningfully impact reported 2007 nine-month revenues. However, on a combined basis, Brookside and USVD generated approximately $13.4 million of revenues and positive EBITDA (earnings before interest, taxes, depreciation and amortization) during the nine months ended September 30, 2007. The Company expects the benefits of the USVD acquisition to become apparent in the fourth quarter of 2007 and beyond. Brookside anticipates organic revenue growth on a combined pro-forma basis next year will result from its strengthened new business pipeline and higher recurring revenues from maintenance and support services. The Company also expects EBITDA improvement on a combined pro-forma basis as a result of product line expansion, incremental revenues from warranty and services, aggregate purchasing discounts, improved efficiencies and operating leverage.

Liquidity and capital requirements

At of September 30, 2007, the Company has cash and cash equivalents of approximately $2.6 million, negative working capital, total assets of $18.3 million, and stockholders’ equity of $9.5 million.

In October, the Company announced it had raised approximately $11 million through a private placement offering consisting of $8 million of senior and subordinated debt and $3 million of equity. The funds were used to finance the USVD acquisition and for working capital purposes. Brookside’s ability to close future acquisitions will likely depend in part on its ability to raise additional capital.

Looking forward, we expect Brookside to generate 2008 revenues of approximately $23 million as a result of existing revenues, organic growth and a full-year revenue contribution from USVD. We anticipate the synergies realized from the combined business, complemented by additional small acquisitions, will fuel growth in Brookside’s revenues to approximately $36 million in 2009 and $45 million in 2010.

Exhibit 7: Projected Pro-forma Revenues $ in millions

Source: Company Reports

We also expect the Company will become profitable in 2008, and we anticipate an increase in operating margins to a 14% range and net margins to a 5% range over the next two years. Brookside is already generating positive EBITDA on a consolidated pro-forma basis in 2007 and we target an improvement in EBITDA margins in a 10-11% range by 2010.

Valuation

At the recent $0.11 share price, Brookside trades at a Price/Sales multiple of less than one time trailing-twelve month pro-forma revenues. Other companies in the diversified communications industry peer group are trading at Price/Sales multiples averaging around two times revenues and Price/Earnings multiples of approximately 15 times earnings. The overall communications services industry peer group is currently trading at Price/Sales multiples ranging around six times revenues and Price/Earnings multiples averaging about 32 times earnings.

Brookside’s diversified communication services industry peers are trading at forward Price/Sales multiples averaging around three times revenues. At less than one time revenues, we believe Brookside is significantly undervalued relative to industry peers. Our target price for Brookside is determined by multiplying our 2008 revenue estimate of $23 million by the peer group average three times forward Price/Sales multiple. This analysis suggests a $69 million market capitalization and $0.85 target price is a fair value for Brookside. As a result, we are initiating coverage of Brookside Technology Holding Corp. with a Speculative Buy rating and a $0.85 target price. Through a combination of organic and acquisition growth, we believe Brookside is poised to grow revenues and earnings faster than its industry peers and emerge as a leading national provider of converged voice and data solutions in the years ahead.

Exhibit 8: Peer Valuations

Source: Reuters Prices on December 12, 2007)

Intense competition

The VoIP segment is highly competitive. Most of Brookside’s competitors are large equipment manufacturers and hosted VoIP solution providers which have greater financial resources and brand recognition. The Company anticipates growth through acquisitions, but competition for attractive telecom acquisition candidates is increasing.

Technological obsolescence

The telecommunications industry is characterized by rapidly evolving technology. To continue to grow in this environment, the Company must keep pace with technological changes and continually update and improve its product and service offerings.

Dependence on key suppliers and vendors

The Company is highly dependent on key suppliers and vendors that provide it with telecom equipment. The loss of a key vendor relationship or delays in receiving an equipment order could adversely affect the Company’s business prospects.

Regulated telecommunications industry

The Company is subjected to FCC regulations and oversight from other federal, state and local agencies. These agencies regulate the development of new technologies such as Internet Protocol-based services, including VoIP and super high-speed broadband and video. Changes in the regulatory environment could increase the Company’s costs for implementing and introducing new services.

Mr. Nole has more than 18 years communications industry experience providing management consulting and business development services to small and mid-size companies. In 1998, he co-founded Experience Total Communications, Inc. (eTC), a communications consulting firm specializing in voice, data and wireless communication solutions. He also formed a subsidiary company, Enterprise Consulting Group, Inc. to offer management consulting and business development services. During his 12-year tenure with Executone Information Systems, Inc., Mr. Nole held various executive management positions in the areas of sales/marketing, inventory management and finance.

Mr. Pacinelli has more than 25 years experience in voice and data communications and has been associated with TAMCO, a telecom-specific finance company, as a consultant and director for the past four years. One of his major achievements was leading the company's expansion to more than 100 metropolitan, regional and national partners from two national level partners. He also co-founded Experience Total Communicat