UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2004 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission File Number 0-26371 EASYLINK SERVICES CORPORATION (Exact Name of Registrant as Specified in its Charter) DELAWARE 13-3787073 (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 33 Knightsbridge Road, Piscataway, NJ 08854 (Address of Principal Executive Office) (Zip Code) (732) 652-3500 (Registrant's Telephone Number Including Area Code) SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: Title of Each Class Name of Exchange on Which Registered --------------------------------------------------------------------- None. SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: Title of Each Class Name of Exchange on Which Registered -------------------------------------------------------------- Class A Common Stock, $0.01 par value NASDAQ National Market Indicate by check whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K [ ] Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2). Yes [ ] No [X] The aggregate market value of the voting stock held by non-affiliates of the registrant as of June 30, 2004 was $54,532,432. Solely for purposes of this calculation, the aggregate voting stock held by non-affiliates has been assumed to be equal to the number of outstanding shares of Class A common stock excluding shares held by all directors and executive officers of the Company and by holders of shares representing more than 10% of the outstanding Class A common stock of the Company. Indicate the number of outstanding shares of each of the registrants' classes of common stock as of February 28, 2005: Class A common stock, 44,244,884 shares. DOCUMENTS INCORPORATED BY REFERENCE Portions of the Proxy Statement for the 2005 Annual Meeting of Shareholders are incorporated by reference into Part III of this Form 10-K. FORM 10-K INDEX Item No. Page No. Part I 1. Business....................................................................................... 3 2. Properties...................................................................................... 10 3. Legal Proceedings............................................................................... 10 4. Submission of Matters to a Vote of Security Holders............................................. 12 Part II 5. Market for Registrant's Common Equity and Related Stockholder Matters......................................................................................... 12 6. Consolidated Selected Financial Data............................................................ 25 7. Management's Discussion and Analysis of Financial Condition and Results of Operations....................................................................... 28 7A. Quantitative and Qualitative Disclosures About Market Risk...................................... 35 8. Consolidated Financial Statements and Supplementary Data........................................ 36 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure............................................................................ 65 9A. Controls and Procedures......................................................................... 65 9B. Other Information............................................................................... 65 Part III The information required by Items 10 through 14 in this part is omitted pursuant to Instruction G of Form 10-K. This information will be included in an amendment to this Form 10-K or a definitive Proxy Statement, pursuant to Regulation 14A, to be filed not later than 120 days after December 31, 2004. Part IV 15. Exhibits and Financial Statement Schedules...................................................... 66 (a) Consolidated Financial Statements and Financial Statement Schedules (1) Consolidated Financial Statements-See Item 8. (2) Financial Statement Schedules - All schedules normally required by Form 10-K are omitted since they are either not applicable or the required information is shown in the consolidated financial statements or the notes thereto. (b) Exhibits ....................................................................................... 66 Signatures........................................................................................... 72 Exhibits............................................................................................. 73 2 This report on Form 10-K has not been approved or disapproved by the Securities and Exchange Commission nor has the Commission passed upon the accuracy or adequacy of this report. We make forward-looking statements within the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995 throughout this report. These statements relate to our future plans, objectives, expectations and intentions. These statements may be identified by the use of words such as "expects," "anticipates," "intends," "believes," "estimates," "plans" and similar expressions. Our actual results could differ materially from those discussed in these statements. Factors that could contribute to such differences include, but are not limited to, those discussed in the "Risk Factors" section of this report. EasyLink Services undertakes no obligation to update publicly any forward-looking statements for any reason even if new information becomes available or other events occur in the future. Unless otherwise indicated or the context otherwise requires, all references to "we," "us," "our," "EasyLink," "EasyLink Services," the "Company" and similar terms refer to EasyLink Services Corporation and its direct and indirect subsidiaries. ITEM 1 BUSINESS COMPANY OVERVIEW We are a provider of services that facilitate the electronic exchange of information between enterprises, their trading communities and their customers. We handle approximately one million transactions per business day that are integral to the movement of money, materials, products and people in the global economy such as insurance claims, trade and travel confirmations, purchase orders, invoices, shipping notices and funds transfers, among many others. We offer a broad range of information exchange services to businesses and service providers, including transaction delivery services involving primarily the electronic delivery of messages and transactions for our customers via EDI, fax, email and telex; and transaction management services, which integrate a range of services and capabilities that help customers better manage a business process in addition to delivering a transaction. We offer our services to thousands of business customers worldwide including many of the Fortune Global 500. In 2004, approximately 74% of EasyLink's revenue was attributable to our United States business and 26% was attributable to our business outside the United States. Outside of the United States, we have either direct and/or indirect distribution channels in Brazil, Dubai, France, Germany, Hong Kong, India, Japan, Korea, Malaysia, Saudi Arabia, Singapore, and the United Kingdom. The United Kingdom is the largest contributor to our international revenues, as well as the primary location of EasyLink's network and servicing infrastructure, outside of the United States. See Note 19 to Consolidated Financial Statements contained in Item 8 of this report for additional information relating to our geographical operations. Our strategy is to expand our position in the information exchange segment of the electronic commerce market by offering to our large customer base as well as new customers a tailored set of transaction delivery and transaction management services that will make our customers more competitive by reducing their costs, the time it takes them to process transactions, and the error rates associated with manual business processes. We believe that growth of our business will result from continued investment by existing and prospective customers in e-commerce systems. These systems generate transactions requiring delivery of information to or management of information among a wide range of partners and customers. We expect that the resulting exchanges of information will occur across an increasingly complex array of disparate networks, marketplaces, systems, technologies and locations. We believe that third-party providers of transaction delivery and transaction management services can substantially reduce the complexity and cost of operating in this environment. Transaction delivery and transaction management services will provide substantial benefits to businesses by migrating people-intensive and paper-based processes to electronic transaction delivery and management services. We expect that businesses will achieve these benefits by improving inventory turnover, accelerating the collection of receivables, automating manual processes, improving customer satisfaction, optimizing purchasing practices and reducing waste and overhead costs. We believe enterprises use EasyLink's transaction delivery and transaction management services to reduce the complexity, cost and time associated with deploying and managing networks to conduct business electronically within all or a part of their trading and customer communities. For example, we help automate the collection and processing of claims forms for insurance carriers, converting the forms submitted by independent agents into electronic information that can be processed directly by the carriers' claims systems. Also, thousands of companies of all sizes use our services to streamline the routing and delivery of purchase orders to and from members of their trading communities. Our customers take advantage of our ability to accept a transaction in just about any form and from virtually any environment in which enterprise transactions originate, and deliver it in just about any form to virtually any other environment, replacing slow, costly, labor and paper-intensive methods that are in wide use today. We derive revenue from per-message charges, per-page charges, per-minute charges, per-character set charges, monthly per-user fees, license fees and consulting fees. 3 Typically, our services extend the capabilities and geographic reach of a customer's e-commerce system. By using our services, a customer can exchange information in a reliable and secure manner and with the flexibility to adapt to the diversity of e-commerce systems and applications in use. Our transaction delivery and transaction management services provide a broad range of capabilities to enterprises, including the ability to: - gain access to and use our services through a variety of commonly used enterprise e-commerce application platforms such as: SAP, Oracle, Web sites, electronic data interchange or EDI systems and others, running on computer systems from mainframe to desktop PC to handheld computer systems; - send and receive and transform information using alternative message types: EDI, fax, e-mail and telex; - connect to our network through the methods in common use today: Internet, dedicated or leased lines, frame relay, virtual private network or VPN and secure dial-up across a phone line; - deliver information securely using a variety of security protocols: IP-SEC; SSL, HTTPS, RSA, S/MIME, PGP and non-repudiation/delivery confirmation capabilities. EasyLink plays the role of a trusted third-party in control of a message from transmission to delivery; - exchange information with other computer networks using a broad range of communication protocols that computer networks use to exchange information: HTTP, SMTP, TCP/IP, FTP, UNIX/UUCP, Telnet, X.400, IBM proprietary; and - transform and exchange information in over 200 document types or formats, including EDI, HTML, XML, PDF, TIFF. - Convert paper and fax transactions into electronic data formats including EDI and XML, which can be processed directly by customer systems such as claims systems, purchasing and payment systems, underwriting systems, workflow systems and databases. Through the ongoing development and introduction of new services, we plan to continue to build upon the substantial customer base, technology and servicing assets we brought together during 2001. We are building these capabilities to increase the accessibility, security, data translation and document transformation capabilities of our network. OUR BUSINESS SERVICES We offer a range of transaction management and transaction delivery services to a customer base composed predominantly of business enterprises. The following chart describes our major service offerings in each category: SERVICE DESCRIPTION TRANSACTION MANAGEMENT SERVICES: -------------------------------------------- INTEGRATED DESKTOP MESSAGING SERVICES EasyLink Integrated Desktop Messaging allows our customers to integrate fax sending and receiving with their existing corporate email systems and associated administrative systems. Offered on an outsourced basis, this service helps align fax communications with existing electronic workflow systems and procedures, including employee administration, security and compliance. In addition to providing user faxing functionality, the service offers several key administrative management features including user administration (including integration with back office personnel systems), call detail reporting for internal accounting support, and private label branding services. 4 EASYLINK DOCUMENT CAPTURE AND MANAGEMENT SERVICES: EasyLink Document Capture and Management Services are a family of services that significantly reduce the time and expense associated with receiving and processing transactions that originate on paper forms by digitally converting them into usable data that can be processed directly by enterprise systems such as production servers, workflow solutions, and databases. The service family currently includes: EasyLink Fax to E-mail Plus Service is an enhanced version of Fax to E-mail service with the ability to route an inbound message based on the information contained in the faxed document rather than just to the single e-mail address associated with the inbound fax number. EasyLink's Fax to Database Service creates database records that combine the received image with associated document information that is captured and verified from predefined fields within the image. Database records can be exported to customer systems or hosted by EasyLink. EasyLink Fax to Data Service is an automated data entry capability which captures information on a received form, verifies it with human operators, and then converts the information into a 'live' data format such as EDI or XML. This data is then exported to customer production systems through various methods. EasyLink Data Conversion Service enables companies to exchange data in different data types, formats and structures. This bi-directional service enables customers to use one consistent data format and to communicate with many other companies which require different data formats. EasyLink supports over 100 data formats which include XML, EDI, text file, CSV, Excel and other commonly used proprietary formats. EASYLINK PRODUCTION MESSAGING PM2.0 SERVICE: EasyLink Production Messaging PM2.0 Service is an enhanced production messaging service that enables our customers to automate and personalize outbound communications with their global business partners. This service allows customers to use Internet-based protocols (SMTP, TLS, FTP, and Secure FTP) and document structures (HTML, XML and Rich Text Format). PM2.0 supports multiple delivery options, including email, fax and file transfer, and provides network-based document transformation services including password protection and encryption of outbound transactions. Easylink's customers are able to integrate their own enterprise applications with our PM2.0 services using application programming interfaces (or APIs) and are able to administer their use of PM2.0 services securely over the web. Outbound transactions delivered via PM2.0 include electronic brokerage statements, newsletters, invoices, travel reservations, price notifications, trade confirmations and other business critical documents. 5 TRANSACTION DELIVERY SERVICES: -------------------------------------------- EDI SERVICES EASYLINK EDI SERVICE EasyLink EDI (Electronic Data Interchange) Service allows our customers to manage the electronic exchange of business documents (such as purchase orders and invoices among others) using standardized formats such as ANSI X.12 and UN-EDIFACT without human intervention. The EasyLink EDI Service offers businesses all the key elements needed for traditional EDI implementation including network, design, systems, software and implementation support. EASYLINK IP-EDI SERVICE IP-EDI SERVICE The EasyLink IP (Internet Protocol) EDI Service provides Internet access to EDI, enabling small to medium sized enterprises to trade with their major partners in a more cost-effective and easier to implement manner. EASYLINK WEB EDI SERVICE EasyLink Web EDI Service provides an intelligent, browser-based data entry interface for trading partners to easily and efficiently exchange business documents electronically. EasyLink typically custom-develops this interface and associated back-end processing capabilities to meet the specific application needs and operating environment of our customer. EASYLINK PRODUCTION MESSAGING SERVICES: EasyLink Production Messaging Services allow our customers to deliver high volumes of mission-critical documents such as invoices, purchase orders, shipping notices, or bank wire transfers from virtually any enterprise environment to global business partners through various non-EDI message delivery modes including e-mail, fax, and telex. Typical applications include on-net conversion of text files to email, fax and telex formats with supporting notification of delivery status to the transaction originator. REVENUES We derive revenue from per-message charges, per-page charges, per-minute charges, per-character set charges, monthly per-user fees, license fees and consulting fees. Our services generate revenue in a number of different ways. We charge our EDI customers per message. Customers of our production messaging services and transaction management services pay consulting fees based upon the level of integration work and set-up requirements plus per-page or per-minute usage charges, depending on the delivery method, for all messages successfully delivered by our network. Customers who purchase our integrated desktop messaging services pay initial site license fees based on the number of user seats being deployed plus per page usage charges for all faxes successfully delivered by our network. WORLDWIDE SALES AND MARKETING Our primary marketing objectives are to: - promote higher usage of our services - retain, cross-sell and upsell our existing customer base; - grow our new customer and distribution base; and - build our brand. 6 We offer our business services in key global markets through multiple sales channels which include a direct field sales force, a direct telesales organization, and alternate channels which include value-added resellers, service aggregators, business technology solutions providers and various types of telecommunications providers. Our own sales organization targets mid and large size companies - typically those having greater than 2000 employees, and in some cases smaller organizations that have a disproportionately large need for one or more of our services. We employ various marketing techniques to generate activity for our sales channels, including advertising, telemarketing and exhibiting at trade shows. CUSTOMER SUPPORT Customer support is available by e-mail or telephone 24x7x365 and is staffed by experienced technical support engineers and customer service representatives. EasyLink Services provides a number of different types of support, including e-mail support, phone support and technical support. Our principal customer support operations are located in the USA and the UK. E-mail support: Customers can contact the customer service organization via e-mail. Inbound e-mails are managed using e-mail management software, allowing customer service to view the history of each customer, prioritize issues based on customer status, classify topic issues and route issues to appropriate customer service representatives. Telephone support: Inbound phone calls are managed using an Automated Call Distribution (ACD) system which directs call-prioritization and skill-based routing. Additionally, proprietary and commercial applications are used to capture customer phone contact information and maintain customer contact history files. Technical support: The customer support teams include technical support engineers. Technical support engineers provide internal subject matter expertise to customer service representatives, analyze root causes for customer contacts, and recommend improvements to products, tools, knowledge bases and training. The engineers also develop support preparation plans to enable customer service to efficiently support new products and services. TECHNOLOGY EASYLINK SERVICES NETWORK The EasyLink Services Network is a distributed, managed Internet Protocol (IP)-based global network that supports all of our Transaction Management and Transaction Delivery services. The EasyLink Services distributed message network is built upon a combination of highly reliable message switching computer systems dispersed around the world. We strive to operate our message systems at 99.5% availability to ensure continuous reliability for EasyLink Services customers' business critical applications. The message switching systems are located at various operational centers in the United States as well as in the United Kingdom. The operational centers are located in major metropolitan centers with easy access to major network providers such as AT&T. This enables EasyLink Services to easily address facility growth. It also allows efficient access to EasyLink Services' major customers and potential markets. All of the EasyLink Services operational centers are secured with continuous power supply. As part of our acquisition of the EasyLink messaging services business, message switches for the transaction delivery network relating to this business are located at premises leased from AT&T. The EasyLink Services messaging nodes are connected by a managed IP-based backbone. The IP backbone is constantly monitored by EasyLink Services operational centers. This allows for diverse routing and efficient management of volumes so that customers do not experience delays in the routing of messages. If a remote node does experience a problem, messages for many of our services can be re-routed to prevent delays in transaction delivery. EasyLink Services maintains firewalls to prevent unsolicited intrusions from the Internet. Any unauthorized attempt is tracked and investigated. The constant monitoring of the network ensures integrity of all messages within the EasyLink Services network. EasyLink Services offers its customers a wide range of secure access methods into the EasyLink Services network. Access methods can include X.25, dedicated point-to-point circuits, frame relay, and virtual private networks (VPN). EasyLink Services' operational centers work in conjunction with its customers to ensure the constant availability of access into the network. Any circuit problems are proactively reported by the EasyLink Services' operational centers. EasyLink Services can also offer its customers managed and secure access on a global basis utilizing AT&T's worldwide network access services. 7 On February 23, 2001, we completed the acquisition of Swift Telecommunications, Inc. and the EasyLink Services business that Swift had just acquired from AT&T Corp. The EasyLink Services business acquired from AT&T provided a variety of transaction delivery services such as EDI and production messaging services. This business was a division of AT&T and was not a separate independent operating entity. We hired only a portion of the employees of the business. Under a Transition Services Agreement, AT&T provided us with a variety of services to enable us to continue to operate the business pending the transition to EasyLink. We have successfully transitioned virtually all of the services provided by AT&T under the Transition Services Agreement to ourselves, including customer service, network operations center, telex switching equipment and services and office space in a variety of locations. The Transition Services Agreement expired on January 31, 2003. However, the network for the portion of this business relating to EDI, fax and email services continues to reside on AT&T's premises under an agreement with AT&T, but is being operated and maintained by EasyLink. This agreement expires on January 31, 2006, and AT&T has informed us that they do not wish to extend the agreement beyond this date. If we are unable to extend the agreement, we will need to either migrate the network off of the AT&T premises to EasyLink's premises or migrate the customers to a replacement network. As a result, we have begun the build out of a new network center at our corporate headquarters located in Piscataway, New Jersey and have commenced the planning process for the migration of these operations to this center. Effective February 1, 2003, the Company entered into a Professional Services Agreement with AT&T providing for technical support at the AT&T facility. The original agreement was for a term of six months but, as provided in the agreement, has been renewed for additional six month periods at EasyLink's request although generally at reduced levels of service. TELECOMMUNICATIONS SERVICES In connection with the acquisition of the EasyLink Services business from AT&T Corporation in 2001, the Company entered into a Master Carrier Agreement with AT&T. Under this agreement, AT&T has provided the Company with a variety of telecommunications services that are required in connection with the provision of the Company's services. In April, 2004, the Company entered into a Data Service Terms and Pricing attachment (the "MCA Attachment") to the Master Carrier Agreement for the renewed purchase of private line and satellite services for a minimum term of 18 months with an option by the Company to extend the term up to an additional 12 months. Under the MCA Attachment, the Company has a minimum purchase commitment for services equal to $3.6 million over the initial contract period of 18 months. If the Company terminates the network connection services or the private line and satellite services prior to the end of the applicable term or AT&T terminates the services for the Company's breach, the Company must pay to AT&T a termination charge equal to 50% of the unsatisfied minimum purchase commitment for these services for the period in which termination occurs plus 50% of the minimum purchase commitment for each remaining commitment period in the term. If the Company decides to exercise the option at the end of the initial contract period, there is no minimum purchase commitment and the service term is on a month-to-month basis. During 2003, the Company entered into a separate agreement for a term of 36 months ending in September 2006 for switched services from AT&T which includes a minimum revenue commitment of $120,000 per year. The Company has complied with the annual minimum revenue commitment for switched services through the annual period ending September 2004. We have committed to purchase from MCI Worldcom a minimum of $900,000 per 12-month period in other telecommunications services through March 2007. COMPETITION Depending on the particular service that we offer, we compete with a range of companies in the transaction delivery services and transaction management services markets, including both premises-based and service-based solutions providers. We believe that our ability to compete successfully will depend upon a number of factors, including market presence; the capacity, reliability and security of our network infrastructure; the pricing policies of our competitors and suppliers; the timing of introductions of new services and service enhancements by us and our competitors; and industry and general economic trends. Competition in the transaction delivery and transaction management sectors varies. Competitors in the EDI and Trading Community Enablement Services markets include Inovis, Internet Commerce Corp., GXS, IBM Interchange Services and Sterling Commerce, Inc., a subsidiary of SBC Communications Inc. Our competitors in the integrated desktop messaging and production messaging markets include PTEK Holdings Inc.'s Xpedite Services and J2 Global Communications as well as a number of smaller, regional providers around the world. Competition in the document capture and management services markets is primarily in the form of software-based solutions customers deploy and operate themselves, as well as a number of small, regional service bureau companies. 8 Many of these competitors have greater market presence, engineering and marketing capabilities, and/or technological, financial and personnel resources than those available to us. As a result, they may be able to develop and expand their communications and network infrastructures more quickly, adapt more swiftly to new or emerging technologies and changes in customer requirements, take advantage of acquisition and other opportunities more readily, and devote greater resources to the marketing and sale of their products and services. In addition, current and potential competitors have established or may establish cooperative relationships among themselves or with third parties to increase the ability of their services to address the needs of our current and prospective customers. Accordingly, it is possible that new competitors or alliances among competitors may emerge and rapidly acquire significant market share. In addition to direct competitors, many of our larger potential customers may seek to internally fulfill their needs through the deployment of their own on premises messaging systems. INTELLECTUAL PROPERTY Our intellectual property is among our most valued assets. We protect our intellectual property, technology and trade secrets primarily through contract, copyrights, trademarks, trade secret laws, restrictions on disclosure and other methods. Parties with whom we discuss, or to whom we show, proprietary aspects of our technology, including employees and consultants, are required to sign confidentiality and non-disclosure agreements. If we fail to protect our intellectual property effectively, our business, operating results and financial condition may suffer. In addition, litigation may be necessary in the future to enforce our intellectual property rights, to protect our trade secrets or to determine the validity and scope of the proprietary rights of others. Notwithstanding these protections, there is a risk that a third party could copy or otherwise obtain and use our technology or trade secrets without authorization. In addition, others may independently develop substantially equivalent technology. The precautions we take may not prevent misappropriation or infringement of our technology. We have patents related to our faxSAV Connector and our "e-mail Stamps" security technology incorporated into our e-mail to fax service. As part of a settlement entered into in September 1998, NetMoves Corporation, which we acquired in February 2000, received a perpetual license from AudioFAX IP, L.L.P. to use certain of AudioFAX's patents relating to store-and-forward technology. The license is fully paid-up. From time to time, third parties have asserted claims against us that our services employ technology covered by their patents. There can be no assurance that third parties will not assert additional infringement claims against us in the future. Patents have been granted recently on fundamental technologies in the communications and desktop software areas, and patents may be issued which relate to fundamental technologies incorporated into our services. As patent applications in the United States are not publicly disclosed until the patent is issued, applications may have been filed which, if issued as patents, could relate to our services. It is also possible that claims could be asserted against us because of the sending of messages over our network or the content of these messages. We could incur substantial costs and diversion of management resources with respect to the defense of any claims that we have infringed upon the proprietary right of others, which costs and diversion could have a material adverse effect on our business, financial condition and results of operations. Furthermore, parties making such claims could secure a judgment awarding substantial damages, as well as injunctive or other equitable relief which could effectively block our ability to license and sell our services in the United States or abroad. Any such judgment could have a material adverse effect on our business, financial condition and results of operations. In the event a claim relating to proprietary technology or information is asserted against us, we may seek licenses to such intellectual property. There can be no assurance, however, that licenses could be obtained on terms acceptable to us, or at all. The failure to obtain any necessary licenses or other rights could have a material adverse effect on our business, financial condition and results of operations. We incorporate licensed, third-party technology in our services. In these license agreements, the licensors have generally agreed to defend, indemnify and hold us harmless with respect to any claim by a third party that the licensed software infringes any patent or other proprietary right. The outcome of any litigation between these licensors and a third party or between us and a third party may lead to our having to pay royalties for which we are not indemnified or for which such indemnification is insufficient, or we may not be able to obtain additional licenses on commercially reasonable terms, if at all. In the future, we may seek to license additional technology to incorporate in our services. The loss of or inability to obtain or maintain any necessary technology licenses could result in delays in introduction of new services or curtailment of existing services, which could have a material adverse effect on our business, results of operations and financial condition. 9 ITEM 2 PROPERTIES UNITED STATES Our headquarters are located in Piscataway, New Jersey where we occupy approximately 67,000 square feet of office, development lab and network space under a lease expiring in 2013. Our headquarters were previously located in Edison, New Jersey, where we have approximately 15,000 square feet still remaining under leases expiring in 2005 and 2006. In addition, we have office, development lab and network space at four other locations throughout the United States under leases expiring primarily in 2005 and 2006; three U.S. network installations co-located in telehousing facilities under short-term leases; and a sales office in New York City under a lease expiring in 2007. In connection with the acquisition of the EasyLink Services business from AT&T we also lease approximately 4,000 square feet under an Equipment Space Sublease Agreement with AT&T, as amended, for the operation of the network equipment for this business through January 31, 2006. While we believe that these facilities meet our anticipated needs at least through the end of 2005, we continually review our needs and may add facilities in the future. INTERNATIONAL We lease approximately 11,000 square feet of office space in two locations in England. One lease for the United Kingdom headquarters in London expires in June 2017, with cancellation allowable, 10 years prior to expiration in 2007. The second lease expires in May 2005. We lease approximately 15,000 square feet of office space in locations in Hong Kong, Germany, Singapore, Malaysia, Brazil, France, South Korea and India. The leases expire at various dates through January 2007. We also have telehousing and co-location agreements under short-term leases for our communications nodes around the world. See the table of long-term obligations and commitments contained in Item 7, Part II, Management's Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources for information relating to our lease commitments. ITEM 3 LEGAL PROCEEDINGS From time to time we have been, and expect to continue to be, subject to legal proceedings and claims in the ordinary course of business. These include claims of alleged infringement of third-party patents, trademarks, copyrights, domain names and other similar proprietary rights; employment claims; claims alleging unsolicited commercial faxes sent on behalf of our customers; and contract claims. These claims include claims that some of our services employ technology covered by third party patents. These claims, even if not meritorious, could require us to expend significant financial and managerial resources. No assurance can be given as to the outcome of one or more claims of this nature. If an infringement claim were determined in a manner adverse to the Company, we may be required to discontinue use of any infringing technology, to pay damages and/or to pay ongoing license fees which would increase our costs of providing service. In connection with the termination of an agreement to sell the portal operations of the Company's discontinued India.com business, the Company brought suit against a broker that it had engaged in connection with the proposed sale of the portal operations alleging, among other things, breach of contract and misrepresentation. The broker brought a counterclaim against the Company for a brokerage fee that would have been payable on the closing of the proposed sale. The court entered a judgment in the amount of $931,000 against the Company. In response to the judgment, the Company filed a motion to alter the judgment in which the Company, among other things, requested that the Court vacate the judgment or reduce the amount of damages. On February 20, 2003, the Court vacated the original judgment and entered a declaratory judgment in EasyLink's favor that EasyLink does not owe the broker any fee or other compensation arising from the failed sale of the portal operations. On March 13, 2003, the broker filed a motion to amend the judgment or for a new trial requesting, among other things, re-instatement of the original judgment or, in the alternative, a new trial. On September 10, 2003, the Court reinstated the previously vacated judgment in favor of the broker in the original amount of $931,000. The Company filed for an appeal. The Court has permitted the Company, in lieu of posting an appeal bond, to place $400,000 into a trust account to provide funds for the payment of the judgment if upheld on appeal. The Company has paid in full the $400,000 into the trust account. Oral arguments on the appeal occurred on September 22, 2004, and the parties await the decision of the Court of Appeals. No assurance can be given as to the Company's likelihood of success or its ultimate liability, if any, in connection with this matter. We cannot assure you that our ultimate liability, if any, in connection with the claim will not have a material adverse effect on our financial condition or cash flows. 10 On November 19, 2003, Depository Trust Company ("DTC") instituted suit against the Company in the United States District Court for the District of New Jersey for moneys allegedly due under a sublease entered into by the Company in September 1999 for premises located in Jersey City, New Jersey. DTC sought additional unspecified amounts from the Company to compensate DTC for alleged damages resulting from the Company's alleged breach of the Sublease and the resulting termination thereof by DTC in October 2001. The Company filed an Answer and Counterclaim against DTC seeking the return of all or a substantial portion of the proceeds of a $1 million letter of credit procured by the Company to secure its obligations under the sublease and drawn upon in full by DTC and alleging that DTC failed to mitigate damages by not re-renting the space. During the fourth quarter of 2004, the Company and DTC settled the lawsuit. Under the settlement, the Company paid DTC $30,000 in partial reimbursement for DTC's legal expenses and the parties agreed to exchange mutual releases with respect to all claims under the lease and the lawsuit. The court has entered an order dismissing the case with prejudice. An Indian-based subsidiary of our discontinued India.com, Inc. subsidiary has received notices of tax assessment from the Indian tax authorities for approximately $650,000 in tax assessments. The subsidiary, which ceased operations in December 2001, intends to defend the assessments. The Company sold its indirect interest in the subsidiary through the disposition of India.com, Inc. in December 2004. This indirect interest in the subsidiary was sold in December 2004 to Gerald Gorman, the former Chairman of the board of directors. The Company previously reported that the staff of the US Securities and Exchange Commission was reviewing certain transactions accounting for approximately $4.8 million of revenue generated by its former advertising network business in 2000, a year in which the Company reported $61.2 million in total revenue. The Company announced that it has reached a settlement of the matter with the SEC. Under the settlement, the Company agreed to the entry of an SEC order requiring that it cease and desist from violations of certain reporting, record keeping and internal control provisions of the federal securities laws. The Company settled without admitting or denying the statements made in the SEC's findings. The order does not impose any fine or other penalty upon EasyLink and does not require restatement of any of EasyLink's historical financial statements. On January 28, 2005, Steven Brin instituted a third party complaint against the Company and four other companies and two individuals for implied indemnification and/or contribution. The case was filed in the Circuit Court of Cook County, Illinois, County Department, Chancery Division, Case No. 03 CH 13062. In the underlying action against Mr. Brin in the same case, titled Jerold Rawson et al. v. Steven Brin et al.,the plaintiffs filed a putative class action against Mr. Brin and the other defendants for allegedly sending or causing to be sent unsolicited advertisements to telephone facsimile machines in violation of the federal Telephone Consumer Protection Act, 47 U.S.C. ss. 227, the Illinois Consumer Fraud and Deceptive Business Practices Act and common law conversion and trespass. Mr. Brin has denied liability to the plaintiffs. Mr. Brin alleges in the third party complaint filed against the Company and the other third-party defendants, however, that, if he is found liable to the plaintiffs in the underlying complaint, then the Company and the other third party defendants should be held liable to Mr. Brin for implied indemnification and/or contribution. The Company has until April 13, 2005 to file its answer or otherwise plead to the third-party complaint, absent an extension. The plaintiff in the underlying lawsuit made an offer to the defendant to settle the claim for $30,000. Although we intend to defend this lawsuit vigorously, we cannot assure you that our ultimate liability, if any, in connection with this matter will not have a material adverse effect on our results of operations, financial condition or cash flows. 11 ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS During the fourth quarter of the fiscal year covered by this report, no matters were submitted to a vote of security holders, through the solicitation of proxies or otherwise. ITEM 5 MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS MARKET PRICE 2004 FOURTH QUARTER THIRD QUARTER SECOND QUARTER FIRST QUARTER -------------- ------------- -------------- ------------- High............................................ $1.66 $1.50 $2.17 $1.90 Low............................................. $1.12 $1.15 $1.09 $1.35 MARKET PRICE 2003 FOURTH QUARTER THIRD QUARTER SECOND QUARTER FIRST QUARTER -------------- ------------- -------------- ------------ High............................................ $1.96 $2.65 $0.88 $1.00 Low............................................. $1.11 $0.63 $0.45 $0.40 The Nasdaq closing market price at February 28, 2005 was $1.08. DIVIDENDS The Company has never declared or paid any cash dividends on its common stock and does not anticipate paying any cash dividends on its stock in the foreseeable future. The Company currently intends to retain future earnings, if any, to pay its obligations and to finance the expansion of its business. The Company's credit agreement with Wells Fargo Foothill, Inc. contains a prohibition on any distribution or any declaration or payment of any dividends (in cash or other property, other than common stock) on, or purchase, acquisition, redemption, or retirement of any of any stock, of any class, of the Company. NUMBER OF SECURITY HOLDERS At February 28, 2005, the approximate number of holders of record of Class A common stock was 637, although there were many more beneficial owners. STOCK LISTINGS The principal market on which the common stock is traded is the NASDAQ National Market under the symbol "EASY". EQUITY COMPENSATION PLAN INFORMATION The following table provides information as of December 31, 2004 with respect to shares of our common stock that may be issued under our existing equity compensation plans. YEAR ENDED DECEMBER 31, 2004 ------------------------------------------------------------------------------------------ NUMBER OF SECURITIES NUMBER OF SECURITES TO BE WEIGHTED AVERAGE EXERCISE REMAINING AVAILABLE FOR ISSUED UPON EXERCISE OF PRICE OF OUTSTANDING FUTURE ISSUANCE UNDER EQUITY OUTSTANDING OPTIONS, OPTIONS, WARRANTS AND COMPENSATION PLANS (EXCLUDING WARRANTS AND RIGHTS RIGHTS SECURITIES REFLECTED IN COLUMN (A)) PLAN CATEGORY (A) (B) (C) ------------- ----------------------- ------------------------ ----------------------------------- Equity compensation plans approved by security holders . . . . . . . . . . . . 4,403,478 $ 2.73 721,465 Equity compensation plans not approved by security holders (1) . . . . . . . . 688,785 $ 10.65 - ----------------------- ------------------------ ----------------------------------- Total: . . . . . . . . . . . . . . . . 5,092,263 $ 3.80 721,465 -------------------------- (1) Includes options to purchase 77,028 shares of Class A common stock at a weighted average exercise price of $13.20 per share under the Netmoves 1996 Stock Option Plan which were assumed in connection with the acquisition of Netmoves Corporation by the Company in 2000. 12 NON-SECURITY HOLDER-APPROVED EQUITY COMPENSATION PLANS Each of the stock option plans listed in the table below under the sub-heading "Plans Adopted in Acquisitions" were adopted or assumed in connection with the acquisition by the Company of the entities after which the plan is named. Except for the 1996 Netmoves Stock Option Plan, the plan terms and conditions are substantially the same as the terms of the Company's plans for which shareholder approval was obtained, except that incentive stock options were not issuable under such plans. Options under each plan were initially granted to employees of the acquired entity who became employees of the Company after the acquisition or, in the case of the 1996 Netmoves Stock Option Plan, were assumed by the Company. The plans are administered by a Committee of the Board of Directors. The Plans may be amended by the Board of Directors. The number of shares underlying outstanding options, the weighted average exercise price and the number of shares underlying options available for future grant under each plan are specified in the table below. The Mail.com 1999 Supplemental Stock Option Plan and the Mail.com 2000 Supplemental Stock Option Plan provide for the grant of options to the Company's directors, employees and consultants and contain terms and conditions that are substantially the same as the terms of the Company's plans for which shareholder approval was obtained, except that incentive stock options are not issuable under such plans. The plans are administered by the Compensation Committee of the Board of Directors. The Plans may be amended by the Board of Directors. Under the plans, options that expire unexercised may be re-granted by the Company to other employees. The number of shares underlying outstanding options, the weighted average exercise price and the number of shares underlying options available for future grant under each of these plans are specified in the table below. YEAR ENDED DECEMBER 31, 2004 -------------------------------------------------------------------------------------- NUMBER OF SECURITIES NUMBER OF SECURITES TO BE WEIGHTED AVERAGE EXERCISE REMAINING AVAILABLE FOR ISSUED UPON EXERCISE OF PRICE OF OUTSTANDING FUTURE ISSUANCE UNDER EQUITY OUTSTANDING OPTIONS, OPTIONS, WARRANTS AND COMPENSATION PLANS (EXCLUDING WARRANTS AND RIGHTS RIGHTS SECURITIES REFLECTED IN COLUMN (A)) PLAN (A) (B) (C) ---- ----------------------- ------------------------ ------------------------------ Plans Adopted in Acquisitions: The Allegro Group Stock Option Plan ............................. 1,139 $ 7.84 - Lansoft Stock Option Plan ........ 600 $ 16.88 - Netmoves 2000 Stock Option Plan... 46,554 $ 17.71 - Netmoves 1996 Stock Option Plan... 77,028 $ 13.20 - Other Plans: Mail.com 1999 Supplemental Stock Option Plan....................... 94,226 $ 8.71 - Mail.com 2000 Supplemental Stock Option Plan....................... 138,260 $ 5.59 - The Company granted non-qualified options under individual stock option agreements to the persons and on the terms indicated in the following table: NAME GRANT DATE EXPIRATION DATE SHARES EXERCISE PRICE ---- -------------- ------------------- ------------ -------------------- Gerald Gorman ....................... 6/1/96 6/1/06 40,000 $1.0000 Gerald Gorman ....................... 12/31/96 12/31/06 7,250 5.0000 Gerald Gorman........................ 2/1/97 2/1/07 2,000 10.0000 Frank Graziano ...................... 11/14/00 1/31/09 4 16.8750 Frank Graziano....................... 11/14/00 3/31/09 165 16.8750 Frank Graziano....................... 11/14/00 2/28/09 338 16.8750 Dave Milligan........................ 6/1/96 6/1/06 25,000 1.0000 Gary Millin ......................... 6/1/96 6/1/06 25,000 1.0000 Gary Millin ......................... 12/31/96 12/31/06 9,700 5.0000 Gary Millin ......................... 2/1/97 2/1/07 2,000 10.0000 Gary Millin ......................... 2/1/97 2/1/07 10,000 10.0000 Thomas Murawski...................... 1/26/01 1/26/11 170,000 12.8125 Charles Walden....................... 2/16/98 2/16/08 39,520 35.0000 ------------ Total ........................ 330,978 ============ 13 RECENT SALES OF UNREGISTERED SECURITIES During the three months ended December 31, 2004, EasyLink Services issued 99,992 shares of Class A common stock in reliance upon the exemption from registration pursuant to Section 4(2) of the Securities Act of 1933 or otherwise based on the inapplicability of the registration requirements of the Act as follows: During the three months ended December 31, 2004, we issued 83,684 shares of Class A common stock to the Company's 401(k) plan for employees' accounts at a weighted average price of $1.38 per share representing the Company's matching contribution to the plan. On December 1, 2004, we issued 7,508 shares valued at $10,677, in payment of interest under the terms of a promissory note pursuant to the terms of the note. During the three months ended December 31, 2004 we issued 8,800 shares to employees in connection with the exercise of employee stock options. RISK FACTORS THAT MAY AFFECT FUTURE RESULTS WE HAVE ONLY A LIMITED OPERATING HISTORY AND SOME OF OUR SERVICES ARE IN A NEW AND UNPROVEN INDUSTRY. We have only a limited operating history upon which you can evaluate our business and our prospects. EasyLink was incorporated under the name Globecomm, Inc. in 1994 in the State of Delaware. We launched our business by offering a commercial email service in November 1996 under the name iName. We changed our company name to Mail.com, Inc. in January 1999. In February 2000, we acquired NetMoves Corporation, a provider of a variety of transaction delivery services to businesses. In March 2000, we formed WORLD.com to develop and operate our domain name properties as independent Web sites. In the fourth quarter of 2000, we announced our intention to focus exclusively on the business market and to sell all assets not related to this business. In February 2001, we acquired Swift Telecommunications, Inc., which had contemporaneously acquired the EasyLink Services business from AT&T Corp. The EasyLink Services business is a provider of transaction delivery services such as electronic data interchange or EDI and production messaging services. Swift was a provider of production messaging services, principally telex services. On March 30, 2001, we announced that we had sold our advertising network business to Net2Phone, Inc., and on May 3, 2001 our Asia.com, Inc. subsidiary completed the sale of its business. In October 2001, we sold a subsidiary of India.com, Inc. and have since ceased the conduct of the portal operations of India.com, Inc. In January 2002, we announced our strategy to expand our position in the transaction delivery segment of the electronic commerce market and to begin to offer to our large customer base related transaction management services that automate more components of our customers' business processes. In 2002, we commercially introduced our Document Capture and Management Services which began to generate revenues in 2003. Our success will depend in part upon our ability to maintain or expand our sales of transaction delivery services, our ability to successfully develop transaction management services, the development of a viable market for fee-based transaction management services on an outsourced basis and our ability to compete successfully in those markets. For the reasons discussed in more detail below, there are substantial obstacles to our achieving and sustaining profitability. WE HAVE INCURRED LOSSES FROM OPERATIONS IN PRIOR YEARS. We achieved income from operations for a full fiscal year for the first time in 2004, but we may not be able to sustain profitability. We had net income of $50.9 million for the year ended December 31, 2003; however, the net income for 2003 included $54.1 million of gains on debt restructuring and settlements. For years prior to 2003 and since our inception in 1999 we incurred net losses in every year resulting in an accumulated deficit of $540.7 million as of December 31, 2004. We intend to upgrade and enhance our technology and networks, increase our sales and marketing expenditures and improve and expand our management information and other internal systems. We intend to continue to make strategic acquisitions and investments where resources permit, which may result in significant amortization of intangibles and other expenses or a later impairment charge arising out of the write-off of assets, including goodwill, booked as a result of such acquisitions or investments. We intend to make these expenditures in anticipation of higher revenues, but there will be a delay in realizing higher revenues even if we are successful. We have experienced declining revenues in each of the years ended December 31, 2004, 2003 and 2002 as compared to the prior year. See Part II, Item 7: Management's Discussion and Analysis of Financial Condition and Results of Operations contained in this report on Form 10-K. If we do not succeed in maintaining or increasing our revenues, our losses may recur. 14 WE MAY NEED TO RAISE CAPITAL IN THE FUTURE TO INVEST IN THE GROWTH OF OUR BUSINESS AND TO FUND NECESSARY EXPENDITURES. We may need to raise additional capital in the future. See Part I. Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources. At December 31, 2004, we had $12.3 million of cash and cash equivalents. Our principal fixed commitments consist of obligations under a credit agreement, obligations under capital leases, obligations under office space leases, accounts payable and other current obligations, commitments for capital expenditures and commitments for telecommunications services. For each of the five years ended December 31, 2004, 2003, 2002, 2001 and 2000, we received a report from our independent accountants containing an explanatory paragraph stating that we have a working capital deficiency and an accumulated deficit that raise substantial doubt about our ability to continue as a going concern. We may need additional financing to invest in the growth of our business and to pay other obligations, and the availability of such financing when needed, on terms acceptable to us, or at all, is uncertain. See "Risk Factors - We have incurred significant indebtedness for money borrowed, and we may be unable to pay debt service on this indebtedness." If we are unable to raise additional financing, generate sufficient cash flow, or restructure our debt obligations before they become due and payable, we may be unable to continue as a going concern. If we raise additional funds by issuing equity securities or debt convertible into equity securities, stockholders may experience significant dilution of their ownership interest. The amount of dilution resulting from issuance of additional shares of Class A common stock and securities convertible into Class A common stock and the potential dilution that may result from future issuances has significantly increased in light of the decline in our stock price. Moreover, we could issue preferred stock that has rights senior to those of the Class A common stock. Some of our stockholders have registration rights that could interfere with our ability to raise needed capital. If we raise funds by issuing debt, our lenders may place limitations on our operations, including our ability to pay dividends, although we do not anticipate paying any cash dividends on our stock in the foreseeable future. WE HAVE INCURRED SIGNIFICANT INDEBTEDNESS FOR MONEY BORROWED, AND WE MAY BE UNABLE TO PAY DEBT SERVICE ON THIS INDEBTEDNESS. As of December 31, 2004, we had outstanding approximately $1.4 million in subordinated convertible notes due in 2005; a term loan of $12 million payable over 5 years; obligations under office space leases; and commitments for telecommunications services. We currently have $4.1 million in principal payments, including $1.4 in payments on the subordinated convertible notes which was made on February 1, 2005, and additional amounts in interest payments due during the twelve month period after December 31, 2004. Our credit facility with Wells Fargo requires us to maintain minimum specified levels of EBITDA and prohibits us from incurring capital expenditures in excess of specified amounts. See "Management's Discussion and Analysis - Liquidity and Capital Resources" contained in this filing on Form 10-K and subsequent filings with the SEC. We recently received a waiver of the capital expenditures covenant for 2004. We cannot assure you that we will be able to pay interest and other amounts due on our outstanding indebtedness, or our other obligations, on the scheduled dates or at all. If our cash flow and cash balances are inadequate to meet our obligations, we could face substantial liquidity problems. If we are unable to generate sufficient cash flow or otherwise obtain funds necessary to make required payments, or if we otherwise fail to comply with any covenants in our indebtedness such as the EBITDA or capital expenditures covenants, we would be in default under these obligations, which would permit these lenders to accelerate the maturity of the obligations and could cause defaults under our indebtedness. Any such default could have a material adverse effect on our business, results of operations and financial condition. We cannot assure you that we would be able to repay amounts due on our indebtedness if payment of the indebtedness were accelerated following the occurrence of an event of default under, or certain other events specified in, the agreements governing our outstanding indebtedness and capital leases. 15 The elimination of outstanding debt pursuant to our debt restructuring completed in 2003 and prior years resulted in substantial cancellation of debt income for income tax purposes. We intend to minimize income tax payable as a result of the restructuring by, among other things, offsetting the income with our historical net operating losses and otherwise reducing the income in accordance with applicable income tax rules. As a result, we do not expect to incur any material current income tax liability from the elimination of this debt. However, the relevant tax authorities may challenge our income tax positions, including the use of our historical net operating losses to offset some or all of the cancellation of debt income and the application of the income tax rules reducing the cancellation of debt income. If we are not able to offset or otherwise reduce the cancellation of debt income, we may incur material income tax liabilities as a result of the elimination of debt and we may be unable to pay these liabilities. We may incur substantial additional indebtedness in the future. The level of our indebtedness, among other things, could (1) make it difficult for us to make payments on our indebtedness, (2) make it difficult to obtain any necessary financing in the future for working capital, capital expenditures, debt service requirements or other purposes, (3) limit our flexibility in planning for, or reacting to changes in, our business, and (4) make us more vulnerable in the event of a downturn in our business. WHERE RESOURCES PERMIT, WE INTEND TO CONTINUE TO ACQUIRE, OR MAKE STRATEGIC INVESTMENTS IN, OTHER BUSINESSES AND ACQUIRE OR LICENSE TECHNOLOGY AND OTHER ASSETS AND WE MAY HAVE DIFFICULTY INTEGRATING THESE BUSINESSES OR GENERATING AN ACCEPTABLE RETURN. We have completed a number of acquisitions and strategic investments since our initial public offering in 1999. For example, we acquired NetMoves Corporation, a provider of production messaging services and integrated desktop messaging services to businesses. We also acquired Swift Telecommunications, Inc. and the EasyLink Services business that it had contemporaneously acquired from AT&T Corp. Where resources permit, we will continue our efforts to acquire or make strategic investments in businesses and to acquire or license technology and other assets, and any of these acquisitions may be material to us. We cannot assure you that acquisition or licensing opportunities will continue to be available on terms acceptable to us or at all. Such acquisitions involve risks, including: - inability to raise the required capital; - difficulty in assimilating the acquired operations and personnel; - inability to retain any acquired member or customer accounts; - disruption of our ongoing business; - the need for additional capital to fund losses of acquired businesses; - inability to successfully incorporate acquired technology into our service offerings and maintain uniform standards, controls, procedures and policies; and - lack of the necessary experience to enter new markets. We may not successfully overcome problems encountered in connection with potential acquisitions. In addition, an acquisition could materially impair our operating results by diluting our stockholders' equity, causing us to incur additional debt or requiring us to incur acquisition expenses or amortize or depreciate acquired intangible and tangible assets or to incur impairment charges as a result of the write-off of assets, including goodwill, recorded as a result of such acquisition. WE MAY BE UNABLE TO SUCCESSFULLY COMPLETE THE MIGRATION OF THE NETWORK RELATING TO OUR BUSINESS ACQUIRED FROM AT&T OFF OF AT&T PREMISES. On February 23, 2001, we completed the acquisition of Swift Telecommunications, Inc. which had contemporaneously acquired the EasyLink Services business of AT&T Corp. The EasyLink Services business acquired from AT&T provides a variety of transaction delivery services. This business was a division of AT&T and was not a separate independent operating entity. 16 Under a Transition Services Agreement entered into in connection with the acquisition, AT&T agreed to provide us with a variety of services to enable us to continue to operate the business pending the transition to EasyLink. We have successfully transitioned virtually all of these services provided by AT&T under the Transition Services Agreement to ourselves, including customer service, network operations center, telex switching equipment and services and office space in a variety of locations. The Transition Services Agreement expired on January 31, 2003. However, the network for the portion of this business relating to EDI, fax and email services continues to reside on AT&T's premises under an agreement with AT&T, but is being operated and maintained by EasyLink. This agreement expires on January 31, 2006, and AT&T has informed us that they will not extend the agreement beyond this date. If we are unable to extend the agreement, we will need to either migrate the network off of the AT&T premises to EasyLink's premises or migrate the customers to a replacement network. As a result, we have begun the build out of a new network center at our corporate headquarters located in Piscataway, New Jersey and have commenced the planning process for the migration of these operations to this center. We cannot assure you that we will be able to successfully migrate the remaining EasyLink Services customers or network from AT&T's premises to our own premises, or successfully integrate them into our operations, in a timely manner or without incurring substantial unforeseen expense or without service interruption to our customers. Even if successfully migrated, we may be unable to operate the business at expense levels that are ultimately profitable for us. We cannot assure you that we will be able to retain all of the customers of the EasyLink Services business. Our inability to successfully migrate, integrate or operate the network and operations, or to retain customers, of the EasyLink Services business will result in a material adverse effect on our business, results of operations and financial condition. OUTSOURCING OF TRANSACTION MANAGEMENT SERVICES MAY NOT PROVE TO BE A VIABLE BUSINESS. An important part of our business strategy is to leverage our existing global customer base and global network by continuing to provide our existing transaction delivery services and by offering these customers additional transaction delivery and new transaction management services in the future. The market for transaction management services is only beginning to develop. Our success will depend on the development of viable markets for the outsourcing of new transaction management services which is somewhat speculative. There are significant obstacles to the full development of a sizable market for the outsourcing of transaction management services. Outsourcing is one of the principal methods by which we will attempt to reach the size we believe is necessary to be successful. Security and the reliability of service, however, are likely to be of concern to enterprises and service providers deciding whether to outsource their transaction management or to continue to provide it themselves. These concerns are likely to be particularly strong at larger businesses and service providers, which are better able to afford the costs of maintaining their own systems. While we intend to focus exclusively on our outsourced transaction delivery and transaction management services, we cannot be sure that we will be able to maintain or expand our business customer base. In addition, the sales cycle for many of these services is lengthy and could delay our ability to generate revenues in this market. OUR STRATEGY OF DEVELOPING AND OFFERING TO EXISTING CUSTOMERS ADDITIONAL TRANSACTION DELIVERY AND TRANSACTION MANAGEMENT SERVICES MAY BE UNSUCCESSFUL. As part of our business strategy, we plan to develop and offer to existing customers additional transaction delivery and transaction management services that will automate more of our customers' business processes. We cannot assure you that we will be able to successfully develop these additional services in a timely manner or at all or, if developed, that our customers will purchase these services or will purchase them at prices that we wish to charge. Standards for pricing in the market for new transaction delivery and transaction management services are not yet well defined and some businesses and service providers may not be willing to pay the fees we wish to charge. We cannot assure you that the fees we intend to charge will be sufficient to offset the related costs of providing these services. WE MAY FAIL TO MEET MARKET EXPECTATIONS BECAUSE OF FLUCTUATIONS IN OUR QUARTERLY OPERATING RESULTS, WHICH WOULD CAUSE OUR STOCK PRICE TO DECLINE. We may experience significant fluctuations in our quarterly results. It is likely that our operating results in some quarters will be below market expectations. In this event, the price of our Class A common stock is likely to decline. The following are among the factors that could cause significant fluctuations in our operating results: 17 - incurrence of other cash and non-cash accounting charges, including charges resulting from acquisitions or dispositions of assets, including from the disposition of our remaining non-core assets, and write-downs of impaired assets; - increases or decreases in the number of transactions generated by our customers (such as insurance claims, trade and travel confirmations, purchase orders, invoices, shipping notices, funds transfers, among others), which is affected by factors that affect specific customers, the respective industries in which our customers conduct business and the economy generally; - non-cash charges associated with the adoption of SFAS 123R, "Share-Based Payment," which requires the recognition of compensation expense for all share-based payments and employee stock options beginning in the third quarter of 2005; - system outages, delays in obtaining new equipment or problems with planned upgrades; - disruption or impairment of the Internet; - demand for outsourced transaction delivery and transaction management services; - attracting and retaining customers and maintaining customer satisfaction; - introduction of new or enhanced services by us or our competitors; - changes in our pricing policy or that of our competitors; - changes in governmental regulation of the Internet and transaction delivery and transaction management services in particular; and - general economic and market conditions and global political factors. WE MAY INCUR SIGNIFICANT STOCK BASED COMPENSATION CHARGES RELATED TO REPRICED OPTIONS IF OUR STOCK PRICE RISES ABOVE $16.90. In light of the decline in our stock price and in an effort to retain our employee base, on November 14, 2000, the Company offered to certain of its employees, officers and directors, other than Gerald Gorman, the right to reprice certain outstanding stock options to an exercise price equal to $16.90 per share, the closing price of the Company's Class A common stock on Nasdaq on November 14, 2000 as adjusted for our reverse stock split effected on January 23, 2002. Options to purchase 632,799 shares were repriced. The repriced options vest at the same rate that they would have vested under their original terms. In March 2000, Financial Accounting Standards Board ("FASB") issued FASB Interpretation No. 44, "Accounting for Certain Transactions Involving Stock Compensation, an interpretation of APB Opinion No. 25" ("Interpretation"). Among other issues, this Interpretation clarifies (a) the definition of employee for purposes of applying Opinion 25, (b) the criteria for determining whether a plan qualifies as a noncompensatory plan, (c) the accounting consequence of various modifications to the terms of a previously fixed stock option or award, and (d) the accounting for an exchange of stock compensation awards in a business combination. As a result, under the Interpretation, stock options repriced after December 15, 1998 are subject to variable plan accounting treatment. This guidance requires the Company to remeasure compensation cost for outstanding repriced options each reporting period based on changes in the market value of the underlying common stock. If our stock price rises above the $16.90 exercise price of the repriced options, this accounting treatment may result in significant non-cash compensation charges in future periods. SEVERAL OF OUR COMPETITORS HAVE SUBSTANTIALLY GREATER RESOURCES, LONGER OPERATING HISTORIES, LARGER CUSTOMER BASES AND BROADER PRODUCT OFFERINGS. Our business is, and we believe will continue to be, intensely competitive. See "Part I Item 1 - Business - Competition" contained in this Form 10-K and subsequent reports filed with the Securities and Exchange Commission. 18 Many of our competitors have greater market presence, engineering and marketing capabilities, and financial, technological and personnel resources than those available to us. As a result, they may be able to develop and expand their communications and network infrastructures more quickly, adapt more swiftly to new or emerging technologies and changes in customer requirements, take advantage of acquisition and other opportunities more readily, and devote greater resources to the marketing and sale of their products and services. In addition, current and potential competitors have established or may establish cooperative relationships among themselves or with third parties to increase the ability of their services to address the needs of our current and prospective customers. Accordingly, it is possible that new competitors or alliances among competitors may emerge and rapidly acquire significant market share. In addition to direct competitors, many of our larger potential customers may seek to internally fulfill their messaging needs through the deployment of their own on premises messaging systems. Some of our competitors provide a variety of telecommunications services and other business services, as well as software and hardware solutions, in addition to transaction delivery or transaction management services. The ability of these competitors to offer a broader suite of complementary services and software or hardware may give them a considerable advantage over us. The level of competition is likely to increase as current competitors increase the sophistication of their offerings and as new participants enter the market. In the future, as we expand our service offerings, we expect to encounter increased competition in the development and delivery of these services. We may not be able to compete successfully against our current or future competitors. IT IS DIFFICULT TO RETAIN KEY PERSONNEL AND ATTRACT ADDITIONAL QUALIFIED EMPLOYEES IN OUR BUSINESS AND THE LOSS OF KEY PERSONNEL AND THE BURDEN OF ATTRACTING ADDITIONAL QUALIFIED EMPLOYEES MAY IMPEDE THE OPERATION AND GROWTH OF OUR BUSINESS AND CAUSE OUR REVENUES TO DECLINE. Our future success depends to a significant extent on the continued service of our key technical, sales and senior management personnel, but they have no contractual obligation to remain with us. In particular, our success depends on the continued service of Thomas F. Murawski, our President and Chief Executive Officer, and Michael A. Doyle, our Vice President and Chief Financial Officer. The loss of the services of Messrs. Murawski or of Mr. Doyle, or several other key employees, would impede the operation and growth of our business. To manage our existing business and handle any future growth, we will have to attract, retain and motivate additional highly skilled employees. In particular, we will need to hire and retain qualified sales people if we are to meet our sales goals. We will also need to hire and retain additional experienced and skilled technical personnel in order to meet the increasing technical demands of our expanding business. Competition for employees in messaging-related businesses is intense. We have in the past experienced, and expect to continue to experience, difficulty in hiring and retaining employees with appropriate qualifications. If we are unable to do so, our management may not be able to effectively manage our business, exploit opportunities and respond to competitive challenges. OUR BUSINESS IS HEAVILY DEPENDENT ON TECHNOLOGY, INCLUDING TECHNOLOGY THAT HAS NOT YET BEEN PROVEN RELIABLE AT HIGH TRAFFIC LEVELS AND TECHNOLOGY THAT WE DO NOT CONTROL. The performance of our computer systems is critical to the quality of service we are able to provide to our customers. If our services are unavailable or fail to perform to their satisfaction, customers may cease using our service. In addition, our agreements with several of our customers establish minimum performance standards. If we fail to meet these standards, our customers could terminate their relationships with us and assert claims for service fee rebates or monetary damages. WE MAY NEED TO UPGRADE SOME OF OUR COMPUTER SYSTEMS TO ACCOMMODATE INCREASES IN TRAFFIC AND TO ACCOMMODATE INCREASES IN THE USAGE OF OUR SERVICES, BUT WE MAY NOT BE ABLE TO DO SO WHILE MAINTAINING OUR CURRENT LEVEL OF SERVICE, OR AT ALL. We must continue to expand and adapt our computer systems as the number of customers and the amount of information they wish to transmit increases and as their requirements change, and as we further develop our services. Because we have only been providing some of our services for a limited time, and because our computer systems for these services have not been tested at greater capacities, we cannot guarantee the ability of our computer systems to connect and manage a substantially larger number of customers or meet the needs of business customers at high transmission speeds. If we cannot provide the necessary service while maintaining expected performance, our business would suffer and our ability to generate revenues through our services would be impaired. 19 The expansion and adaptation of our computer systems will require substantial financial, operational and managerial resources. We may not be able to accurately project the timing of increases in traffic or other customer requirements. In addition, the very process of upgrading our computer systems could cause service disruptions. For example, we may need to take various elements of the network out of service in order to install some upgrades. OUR COMPUTER SYSTEMS MAY FAIL AND INTERRUPT OUR SERVICE. Our customers have in the past experienced interruptions in our services. We believe that these interruptions will continue to occur from time to time. These interruptions are due to hardware failures, failures in telecommunications and other services provided to us by third parties and other computer system failures. These failures have resulted and may continue to result in significant disruptions to our service. Some of our operations have redundant switch-over capability. Although we plan to install backup computers and implement procedures on other parts of our operations to reduce the impact of future malfunctions in these systems, the presence of single points of failure in our network increases the risk of service interruptions. In addition, substantially all of our computer and communications systems relating to our services are currently located in Glen Head, New York; Jersey City, New Jersey; Piscataway, New Jersey; Washington, DC; Bridgeton, Missouri; Dayton, Ohio, and London, England. We currently do not have alternate sites from which we could conduct these operations in the event of a disaster. Our computer and communications hardware is vulnerable to damage or interruption from fire, flood, earthquake, power loss, telecommunications failure and similar events. Our services would be suspended for a significant period of time if any of our primary data centers was severely damaged or destroyed. We might also lose customer transaction documents and other customer files, causing significant customer dissatisfaction and possibly giving rise to claims for monetary damages. We plan to consolidate over time an increasing portion of our computer systems and networks, including the migration of the network equipment from the leased AT & T facility to our corporate headquarters. This consolidation may result in interruptions in our services to some of our customers. OUR SERVICES WILL BECOME LESS DESIRABLE OR OBSOLETE IF WE ARE UNABLE TO KEEP UP WITH THE RAPID CHANGES CHARACTERISTIC OF OUR BUSINESS. Our success will depend on our ability to enhance our existing services and to introduce new services in order to adapt to rapidly changing technologies, industry standards and customer demands. To compete successfully, we will have to accurately anticipate changes in business demand and add new features to our services very rapidly. We may not be able to develop or integrate the necessary technology into our computer systems on a timely basis or without degrading the performance of our existing services. We cannot be sure that, once integrated, new technology will function as expected. Delays in introducing effective new services could cause existing and potential customers to forego use of our services. OUR BUSINESS WILL SUFFER IF WE ARE UNABLE TO PROVIDE ADEQUATE SECURITY FOR OUR SERVICE, OR IF OUR SERVICE IS IMPAIRED BY SECURITY MEASURES IMPOSED BY THIRD PARTIES. Security is a critical issue for any outsourced transaction delivery or transaction management service, and presents a number of challenges for us. If we are unable to maintain the security of our service, our reputation and our ability to attract and retain customers may suffer, and we may be exposed to liability. Third parties may attempt to breach our security or that of our customers whose networks we may maintain or for whom we provide services. If they are successful, they could obtain information that is sensitive or confidential to a customer or otherwise disrupt a customer's operations or obtain confidential information, including our customer's profiles, passwords, financial account information, credit card numbers, message content, stored email or other personal or business information or similar information relating to our customer's customers. Our customers or their employees or customers may assert claims for money damages for any breach in our security and any breach could harm our reputation. 20 Our computers are vulnerable to computer viruses, physical or electronic break-ins and similar incursions, which could lead to interruptions, delays or loss of data. We expect to expend significant capital and other resources to license or create encryption and other technologies to protect against security breaches or to alleviate problems caused by any breach. Nevertheless, these measures may prove ineffective. Our failure to prevent security breaches may expose us to liability and may adversely affect our ability to attract and retain customers and develop our business market. Security measures taken by others may interfere with the efficient operation of our service, which may harm our reputation and adversely impact our ability to attract and retain customers. "Firewalls" and similar network security software employed by third parties can interfere with the operation of our services. Our customers are subject to, and in turn require that their service providers meet, increasingly strict guidelines for network and operational security. If we are unable to meet the security requirements of a customer, we may be unable to obtain or keep their business. This is particularly the case for customers in the health insurance and financial services industries, which are subject to legal requirements governing the security and confidentiality of customer information. WE ARE DEPENDENT ON LICENSED TECHNOLOGY AND THIRD PARTY COMMERCIAL PARTNERS. We license a significant amount of technology from third parties, including technology related to our Internet fax services, billing processes and databases. We also rely on third party commercial partners to provide services for our trading community enablement services, document capture and management services and some of our other services. We anticipate that we will need to license additional technology or to enter into additional commercial relationships to remain competitive. We may not be able to license these technologies or to enter into arrangements with prospective commercial partners on commercially reasonable terms or at all. Third-party licenses and strategic commercial relationships expose us to increased risks, including risks relating to the integration of new technology, the diversion of resources from the development of our own proprietary technology, a greater need to generate revenues sufficient to offset associated license or service fee costs, and the possible termination of or failure to renew an important license or other agreement by the third-party licensor or commercial partner. IF THE INTERNET AND OTHER THIRD-PARTY NETWORKS ON WHICH WE DEPEND TO DELIVER OUR SERVICES BECOME INEFFECTIVE AS A MEANS OF TRANSMITTING DATA, THE BENEFITS OF OUR SERVICE MAY BE SEVERELY UNDERMINED. Our business depends on the effectiveness of the Internet as a means of transmitting data. The recent growth in the use of the Internet has caused frequent interruptions and delays in accessing and transmitting data over the Internet. Any deterioration in the performance of the Internet as a whole could undermine the benefits of our services. Therefore, our success depends on improvements being made to the entire Internet infrastructure to alleviate overloading and congestion. We also depend on telecommunications network suppliers such as AT&T Corporation, MCI and XO Communications for a variety of telecommunications and Internet services. The network for the EasyLink Services business acquired from AT&T continues to reside on AT&T's premises. See "Risk Factors - We may be unable to successfully complete the migration of the network relating to our business acquired from AT&T off of AT&T premises" above, "Item 1. Business - Technology" contained in this Form 10-K and subsequent filings with the Securities and Exchange Commission. OUR INTERNATIONAL OPERATIONS ARE SUBJECT TO SIGNIFICANT RISKS AND OUR OPERATING RESULTS MAY SUFFER IF OUR REVENUES FROM INTERNATIONAL OPERATIONS DO NOT EXCEED THE COSTS OF THOSE OPERATIONS. We operate in international markets. We may not be able to compete effectively in these markets. If our revenues from international operations do not exceed the expense of establishing and maintaining these operations, our operating results will suffer. We face significant risks inherent in conducting business internationally, such as: - uncertain demand in foreign markets for transaction delivery and transaction management services; - difficulties and costs of staffing and managing international operations; - differing technology standards; - difficulties in collecting accounts receivable and longer collection periods; - economic instability and fluctuations in currency exchange rates and imposition of currency exchange controls; 21 - potentially adverse tax consequences; - regulatory limitations on the activities in which we can engage and foreign ownership limitations on our ability to hold an interest in entities through which we wish to conduct business; - political instability, unexpected changes in regulatory requirements, and reduced protection for intellectual property rights in some countries; - export restrictions; - terrorism; and - difficulties in enforcing contracts and potentially adverse consequences. REGULATION OF TRANSACTION DELIVERY AND TRANSACTION MANAGEMENT SERVICES AND INTERNET USE IS EVOLVING AND MAY ADVERSELY IMPACT OUR BUSINESS. Currently, few laws or regulations specifically regulate activity on the Internet. With some exceptions, online activity is not subject to laws and regulations that differ from those applicable to offline activities. In cases where online activity is subject to unique regulatory regimes, those regulatory approaches currently tend to be less burdensome than their offline counterparts. Laws and regulations may, however, be adopted in the future to address issues such as user privacy, pricing, and the characteristics and quality of products and services in the online context specifically, or to impose traditional regulatory paradigms on online activity. The Federal Communications Commission ("FCC") is currently considering whether to impose certain regulations on some entities that provide service using the Internet or Internet protocol ("IP"), including but not limited to voice over Internet Protocol ("VoIP") telephony. Such potential rules could include requirements to provide enhanced 911 capability, ensure access for disabled persons, cooperate with law enforcement, contribute to universal service funds, and pay for using the public telephone network. Any of these requirements, if applicable to a given service, could increase the cost of providing that service. It cannot yet be predicted whether those rules will be adopted at all and, if so, whether they would be applied to our non-voice services. The Company and its customers are subject to laws and regulations protecting personal and other confidential information in connection with the exchange of this information by these customers using the Company's services. At present, in the United States, interactive Internet-based service providers have substantial legal protection for the transmission of third-party content that is infringing, defamatory, pornographic, or otherwise illegal. We cannot guarantee that a U.S. court would not conclude that we do not qualify for these protections as an interactive service provider. We do not and cannot screen all of the content generated and received by users of our services or the recipients of messages delivered through our services. Some foreign governments, such as Germany and France, have enforced content-related laws and regulations against Internet service providers. We believe that our services are "information services" under the Telecommunications Act of 1996 and related precedent and therefore would not currently be subject to traditional U.S. telecommunication services regulation. Although the FCC has indicated that it views Internet-based services as being interstate and subject to the protection of federal laws that warrant preemption of state efforts to impose traditional common carrier regulation on such services, the FCC's efforts are currently under legal challenge and we cannot predict the outcome of state efforts to regulate such services or the scope of federal policy to preempt such efforts. While the FCC historically has refrained from regulating IP-based communications, it has also sought comment about whether and to what extent it should regulate such communications in the future. Continued changes in telecommunications regulations may significantly reduce the cost of domestic and international calls. To the extent that the cost of domestic and international calls decreases, we will face increased competition for our fax services which may have a material adverse effect on our business, financial condition, or results of operations. 22 FCC regulations require providers of telecommunications services to contribute to the Universal Service Fund, a fund established to subsidize telecommunications service in rural areas in the United States. Such providers are authorized to then pass those contribution costs on to their customers; our costs for telecommunications services that we purchase thus reflect these amounts. The contributions are currently calculated as a percentage of telecommunications services revenues. Alternative contribution methodologies, such as the imposition of a fee per telephone line, and other changes have been proposed that could increase these amounts and thus our costs in purchasing such telecommunications services. If adopted, these changes may in turn require us to raise the price of one or more of our services to our customers. No assurance can be given that we will be able to recover all or part of any increase in costs that may result from these changes if adopted by the FCC or that such changes will not otherwise adversely affect the demand for our services. In connection with the deployment of Internet-capable nodes in countries throughout the world, we are required to satisfy a variety of foreign regulatory requirements. We intend to explore and seek to comply with these requirements on a country-by-country basis as the deployment of Internet-capable fax nodes continues. There can be no assurance that we will be able to satisfy the regulatory requirements in each of these countries, and the failure to satisfy such requirements may prevent us from installing Internet-capable fax nodes in such countries or require us to limit the functionality of such nodes. The failure to deploy a number of such nodes could have a material adverse effect on our business, operating results, and financial condition. Our fax nodes and telex switches utilize encryption technology. The export of such encryption technology is regulated by the United States government. We have authority for the export of such encryption technology other than to countries such as Cuba, Iran, Libya, Syria, Sudan and North Korea. Nevertheless, there can be no assurance that such authority will not be revoked or modified at any time for any particular jurisdiction or in general. In addition, there can be no assurance that such export controls, either in their current form or as may be subsequently enacted, will not limit our ability to distribute our services outside of the United States or electronically. While we take precautions against unlawful exportation of our software, the global nature of the Internet makes it virtually impossible to effectively control the distribution of our services. Moreover, future Federal or state legislation or regulation may further limit levels of encryption or authentication technology. Any such export restrictions, the unlawful exportation of our services, or new legislation or regulation could have a material adverse effect on our business, financial condition and results of operations. The legal structure and scope of operations of our subsidiaries in some foreign countries may be subject to restrictions that could severely limit our ability to conduct business in these countries. To the extent that we develop or offer messaging or other services in foreign countries, we will be subject to the laws and regulations of these countries. The laws and regulations relating to the Internet and telecommunications services in many countries are evolving and in many cases are more burdensome than U.S. law and/or unclear as to their application. For example, in India, the PRC, and other countries, we may be subject to licensing requirements with respect to the activities in which we propose to engage and we may also be subject to foreign ownership limitations or other approval requirements that preclude our ownership interests or limit our ownership interests to up to specified percentages of the entities through which we propose to conduct any regulated activities. If these limitations apply to our activities (including activities conducted through our subsidiaries), our opportunities to generate revenue will be reduced, our ability to compete successfully in these markets will be adversely affected, our ability to raise capital in the private and public markets may be adversely affected, and the value of our investments and acquisitions in these markets may decline. Moreover, to the extent we are limited in our ability to engage in certain activities or are required to contract for these services from a licensed or authorized third party, our costs of providing our services will increase and our ability to generate profits may be adversely affected. OUR INTELLECTUAL PROPERTY RIGHTS ARE CRITICAL TO OUR SUCCESS, BUT MAY BE DIFFICULT TO PROTECT. We regard our copyrights, service marks, trademarks, trade secrets, domain names and similar intellectual property as critical to our success. We rely on trademark and copyright law, trade secret protection and confidentiality and/or license agreements with our employees, customers, strategic partners and others to protect our proprietary rights. Despite our precautions, unauthorized third parties may improperly obtain and use information that we regard as proprietary. Third parties may submit false registration data attempting to transfer key domain names to their control. Our failure to pay annual registration fees for domain names may result in the loss of these domains to third parties. The status of United States patent protection for software products and services is not well defined and will evolve as additional patents are granted. We have applied for a patent for some of our services, and we do not know if our application will be issued with the scope of the claims we seek or at all. The laws of some foreign countries do not protect proprietary rights to the same extent as do the laws of the United States. Our means of protecting our proprietary rights in the United States or abroad may not be adequate and competitors may independently develop similar technology. 23 Third parties may infringe or misappropriate our copyrights, trademarks and similar proprietary rights. In addition, other parties have asserted and may in the future assert infringement claims against us. We cannot be certain that our services do not infringe issued patents. Because patent applications in the United States are not publicly disclosed until the patent is issued, applications may have been filed which relate to our services. We have been and may continue to be subject to legal proceedings and claims from time to time in the ordinary course of our business, including claims related to the use of our domain names and claims of alleged infringement of the trademarks and other intellectual property rights of third parties. WE MAY INCUR EXPENSES AND LIABILITIES AS A RESULT OF PENDING LEGAL PROCEEDINGS. The Company is involved in legal proceedings that may result in additional expenses or liability. See "Legal Proceedings" contained in Part I, Item 3 of this Form 10-K and subsequent filings with the Securities and Exchange Commission. These proceedings include a broker's fee dispute in which the Company is appealing a $931,000 judgment imposed on it and a claim for indemnification and contribution by a defendant in an unsolicited commercial fax lawsuit. Although the Company intends to pursue its defense of these matters vigorously, no assurance can be given that the Company's efforts will be successful. To the extent that the Company is not successful in appealing the judgment or defending the indemnification and contribution claim, it will be required to pay the judgment in the broker's fee dispute or to pay any judgment that may be rendered in such claim. The Company has already paid $400,000 into a trust account to secure the payment of the judgment relating to the broker fee if the judgment is upheld on appeal. Although we intend to defend vigorously these matters, we cannot assure you that our ultimate liability, if any, in connection with these matters will not have a material adverse effect on our results of operations, financial condition or cash flows. A SUBSTANTIAL AMOUNT OF OUR COMMON STOCK MAY COME ONTO THE MARKET IN THE FUTURE, WHICH COULD DEPRESS OUR STOCK PRICE. Sales of a substantial number of shares of our common stock in the public market could cause the market price of our Class A common stock to decline. As of February 28, 2005, we had an aggregate of 44,244,884 shares of Class A common stock outstanding. As of February 28, 2005, we had options to purchase 4,935,677 shares of Class A common stock outstanding and warrants to purchase 798,523 shares of Class A common stock outstanding. As of February 28, 2005, substantially all of the shares of our outstanding Class A common stock were freely tradable, in some cases subject to the volume and manner of sale limitations contained in Rule 144. We may issue large amounts of additional Class A common stock, which may also be sold and which could adversely affect the price of our stock. Approximately 23.6 million of our outstanding shares were issued in connection with the elimination of debt during the nine months ended September 30, 2003. If the holders of these shares sell large numbers of shares, these holders could cause the price of our Class A common stock to fall. The holders of approximately 8.2 million shares of outstanding Class A common stock and the holders of 0.8 million shares of Class A common stock issuable upon exercise of our outstanding warrants had the right, subject to various conditions, to require us to file registration statements covering their shares or to include their shares in registration statements that we may file for ourselves or for other stockholders. By exercising their registration rights and selling a large number of shares, these holders could cause the price of the Class A common stock to fall. An undetermined number of these shares have been sold publicly pursuant to Rule 144. OUR CLASS A COMMON STOCK MAY BE SUBJECT TO DELISTING FROM THE NASDAQ NATIONAL MARKET. Our Class A common stock may face potential delisting from the Nasdaq National Market which could hurt the liquidity of our Class A common stock. We may be unable to comply with the standards for continued listing on the Nasdaq National Market. These standards require, among other things, that our Class A common stock have a minimum bid price of $1. Specifically, an issuer will be considered non-compliant with the minimum bid price requirement only if it fails to satisfy the applicable requirement for 30 consecutive business days. It would then be afforded a 180-calendar day grace period in which to regain compliance. If a National Market issuer does not regain compliance with the 180-day period, it may transfer to The Nasdaq SmallCap Market, provided that it meets all applicable requirements for initial inclusion on the SmallCap Market other than the minimum bid price requirement, or it can request a hearing to remain on the National Market. In addition, the listing standards require that we maintain compliance with various other standards, including market capitalization or total assets and total revenue, number of publicly held shares, which are shares held by persons who are not officers, directors or beneficial owners of 10% of our outstanding shares, and market value of publicly held shares. Alternatively, we can comply with certain other standards, including a $10 million minimum stockholders' equity requirement. The minimum bid price of our stock was below $1 during various periods prior to July 11, 2003 and from April 4, 2005 [through the date of the filing of this report on Form 10-K.] If we are unable to maintain compliance with the minimum bid price, we may be subject to delisting. 24 We had a total stockholders' equity in the amount of $13.0 million as of December 31, 2004 in comparison to the $10 million minimum total stockholders' equity requirement. An alternative listing standard to the minimum total stockholders equity standard requires that we maintain a minimum market value of our publicly held shares of not less than $15 million. As of the filing of this Form 10-K, we were in compliance with the $15 million minimum market value of publicly held shares alternative standard. There can be no assurance that EasyLink will maintain compliance with the minimum bid price requirement or that it will maintain compliance with the other listing standards, including the minimum total stockholders' equity requirement or the $15 million minimum market value of publicly held shares requirement. EasyLink notified Nasdaq on October 13, 2004 that, if EasyLink did not appoint another independent director to its board on or before November 12, 2004, EasyLink would no longer be in compliance with Nasdaq Marketplace Rule 4350(c), which requires that a majority of the board of directors be comprised of independent directors as defined in Nasdaq Marketplace Rule 4200. Since that time and through the first quarter of 2005, EasyLink appointed three additional independent directors and two management directors have departed. Accordingly, EasyLink now has six independent directors and one management director on its board and has regained compliance with NASDAQ's independent director requirements. If our common stock were to be delisted from trading on the Nasdaq National Market and were neither re-listed thereon nor listed for trading on the Nasdaq Small Cap Market or other recognized securities exchange, trading, if any, in the Class A common stock may continue to be conducted on the OTC Bulletin Board or in the non-Nasdaq over-the-counter market. Delisting would result in limited release of the market price of the Class A common stock and limited news coverage of EasyLink and could restrict investors' interest in our Class A common stock and materially adversely affect the trading market and prices for our Class A common stock and our ability to issue additional securities or to secure additional financing. OUR STOCK PRICE HAS BEEN VOLATILE AND WE EXPECT THAT IT WILL CONTINUE TO BE VOLATILE. Our stock price has been volatile since our initial public offering and we expect that it will continue to be volatile. As discussed above, our financial results are difficult to predict and could fluctuate significantly. In addition, the market prices of securities of electronic services companies have been highly volatile. A stock's price is often influenced by rapidly changing perceptions about the future of electronic services or the results of other Internet or technology companies, rather than specific developments relating to the issuer of that particular stock. As a result of volatility in our stock price, a securities class action may be brought against us. Class-action litigation could result in substantial costs and divert our management's attention and resources. ITEM 6 CONSOLIDATED SELECTED FINANCIAL DATA The following consolidated selected financial data should be read in conjunction with the consolidated financial statements and the notes to these statements and "Management's Discussion and Analysis of Financial Condition and Results of Operations" elsewhere in this document. The consolidated financial statements included herein have been prepared assuming that the Company will continue as a going concern. The Company's independent public accountants have included an explanatory paragraph in their audit report accompanying the 2004 consolidated financial statements. The explanatory paragraph states that the Company has a working capital deficiency and an accumulated deficit that raises substantial doubt about its ability to continue as a going concern. Management's plans in regard to this matter are also described in Note 1(b). The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty. 25 We believe that due to the many acquisitions and dispositions, goodwill and intangibles impairment charges and debt restructuring gains that occurred during the period from 2000 through 2004, the period to period comparisons for 2000 through 2004 are not meaningful and should not be relied upon as indicative of future performance. 26 Five Year Summary of Selected Financial Data (in thousands, except per share and employee data) 2004 2003 2002 2001 2000 -------- -------- -------- -------- -------- Consolidated Statement of Operations Data for the Year Ended December 31, Revenues............................................ $91,840 $101,347 $114,354 $123,929 $52,698 Total cost of revenues and operating expenses (a)... 83,163 102,264 201,287 296,170 204,196 Total other income (expense), net (b)............... 825 52,803 1,088 28,203 (7,405) Income (loss) from operations....................... 8,677 (917) (86,933) (172,241) (151,498) Loss from discontinued operations................... -- (938) -- (63,027) (70,624) Extraordinary gain.................................. -- -- -- 782 -- Net income (loss)................................... 7,602 50,948 (85,845) (206,283) (229,527) Basic net income(loss) per common share: Income(loss) from continuing operations............. $0.17 $1.47 (5.13) (15.26) (27.79) Loss from discontinued operations................... -- (0.03) -- (6.68) (12.35) Extraordinary gain.................................. -- -- -- 0.09 -- -------- -------- -------- -------- -------- Basic net income (loss) per common share............ $0.17 $1.44 $(5.13) $(21.85) $(40.14) ======== ======== ======== ======== ======== Diluted net income(loss) per common share: Income(loss) from continuing operations............. $0.17 $1.46 (5.13) (15.26) (27.79) Loss from discontinued operations................... -- (0.03) -- (6.68) (12.35) Extraordinary gain.................................. -- -- -- 0.09 -- -------- -------- -------- -------- -------- Diluted net income(loss) per common share........... $0.17 $1.43 $(5.13) $(21.85) $(40.14) ======== ======== ======== ======== ======== Weighted average basic shares outstanding........... 44,004 35,402 16,733 9,442 5,718 Weighted average diluted shares outstanding......... 44,891 35,654 16,733 9,442 5,718 Consolidated Balance Sheet Data at December 31, Cash and cash equivalents........................... 12,300 6,623 9,554 13,278 4,331 Marketable securities............................... 2,023 -- -- -- 12,595 Total current assets................................ 26,525 19,813 23,511 36,900 86,490 Property and equipment, net......................... 8,125 10,641 14,833 21,956 38,997 Goodwill and other intangible assets, net........... 15,112 17,895 20,814 107,937 154,804 Total assets........................................ 50,526 49,411 61,011 170,242 306,917 Total current liabilities........................... 26,783 31,575 43,126 54,494 54,242 Long-term capital lease obligations................. 43 37 196 566 12,638 Capitalized interest on notes payable, less current portion -- 956 7,402 13,750 -- Long-term notes payable............................. 9,600 10,511 71,398 80,923 100,321 Total stockholders' equity (deficit)................ 13,048 4,412 (61,822) 20,503 138,935 Number of employees at December 31,................. 469 483 572 587 1,401 -------- -------- -------- -------- -------- (a) Included in operating expenses are: 2004 2003 2002 2001 2000 -------- -------- -------- -------- -------- Amortization of goodwill and other intangible assets.(1) ......................................... 2,686 2,919 6,751 52,068 39,977 Write-off of acquired in-process technology......... -- -- -- -- 7,650 Impairment of intangible assets..................... 500 -- 78,784 62,200 -- Restructuring charges (credits)..................... (350) 1,478 2,320 25,337 5,338 (Gain) loss on sale of businesses/Mailwatch service line................................................ (5,017) -- (426) 1,804 -- (b) Included in other income (expense), net are: 2004 2003 2002 2001 2000 -------- -------- -------- -------- -------- Interest income..................................... 70 36 189 565 4,686 Interest expense.................................... (517) (1,390) (4,785) (10,383) (9,791) Gain on debt restructuring and settlements.......... 984 54,078 6,558 47,960 -- Impairment of investments........................... -- -- (1,515) (10,131) (200) Loss on equity investment........................... -- -- -- -- (2,100) Other, net.......................................... 288 79 641 192 -- See "Management's Discussion and Analysis of Financial Condition and Results of Operations" for a discussion of factors that affect the comparability of the selected financial data in the years presented above. (1) The Company adopted SFAS No. 142 " Goodwill and Other Intangible Assets" as of January 1, 2002, as discussed in Note 5. 27 ITEM 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion and analysis of the financial condition and results of operations should be read in conjunction with our consolidated financial statements and the related notes included elsewhere in this annual report. The consolidated financial statements included herein have been prepared assuming that the Company will continue as a going concern. The Company's independent public accountants have included an explanatory paragraph in their audit report accompanying the 2004 consolidated financial statements. The explanatory paragraph states that the Company has a working capital deficiency and an accumulated deficit that raise substantial doubt about its ability to continue as a going concern. Management's plans in regard to this matter are also described in Note 1(b). The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty. OVERVIEW We are a provider of services that facilitate the electronic exchange of information between enterprises, their trading communities and their customers. On an average business day, we handle approximately one million transactions that are integral to the movement of money, materials, products and people in the global economy such as insurance claims, trade and travel confirmations, purchase orders, invoices, shipping notices and funds transfers, among many others. We offer a broad range of information exchange services to businesses and service providers, including Transaction Management Services and Transaction Delivery Services. Transaction Management Services consist of integrated desktop messaging services and document capture and management services such as fax to database, fax to data and data conversion services. Beginning in 2005, we will also offer as a Transaction Management Service an enhanced production messaging service that we call EasyLink Production Messaging PM2.0 Service. Transaction Delivery Services consist of electronic data interchange or "EDI," and basic production messaging services utilizing email, fax and telex. As part of our strategy, we will seek to upgrade customers who are using our basic production messaging service to our enhanced production messaging service known as EasyLink Production Messaging PM2.0 Service. See Part I, Item 1, "Business - Company Overview" contained in this Form 10-K. Until July 31, 2004, we also offered MailWatch services to protect corporate e-mail systems, which included virus protection, spam control and content filtering services. REVENUES For the year ended December 31, 2004 total revenues were $91.8 million in comparison to $101.3 million in 2003 and $114.4 million in 2002. As detailed in the schedule below the declines in revenue in 2004 and 2003 as compared to the prior years were attributable to (1) lower revenues in our Transaction Delivery Services amounting to $11.3 million or 13% in 2004 as compared to 2003 and $16.0 million or 15% in 2003 as compared to 2002; and (2) $2.2 million in lower MailWatch revenues in 2004 as a result of the sale of this service line as of July 31, 2004. These declines were partially offset by increased revenues in our Transaction Management Services of $4.0 million in 2004 representing 48% growth over 2003 and $2.5 million representing 42% growth in 2003 as compared to 2002. PERCENT CHANGE --------------------- 2004 2003 2004 2003 2002 VS. 2003 VS. 2002 ---- ---- ---- -------- -------- Transaction Management Services $12,304 $ 8,334 $5,852 48% 42% Transaction Delivery Services 77,063 88,348 104,308 (13)% (15)% MailWatch 2,473 4,665 4,194 (47)% 11% --------- --------- -------- ----- ----- $91,840 $101,347 $114,354 (9)% (11)% Transaction Delivery Services have been continually impacted by pricing pressures in the telecommunications market and by technological factors that replace or reduce the deployment of such services by our customers. This has led to lower volumes, negotiated individual customer price reductions at the time of service contract renewals and the loss of certain customers. Although we have focused efforts on stabilizing this revenue stream, we believe the trend will continue throughout 2005. We will seek to expand our newer Transaction Management Services and to upgrade customers who are using our basic production messaging services to our enhanced production messaging service, EasyLink Production Messaging PM2.0 Service, to offset the declines so that total Company revenues can be positioned to grow beginning in 2006. OPERATING RESULTS Our operating results have continued to improve in 2004 and 2003 even though revenues declined in comparison to prior years. Income from operations amounted to $8.7 million (including $5.0 million of gains on the sale of our MailWatch service line and our domain assets) in 2004 in comparison to losses from operations of $(0.9) million in 2003 and $(86.9) million in 2002. The 2002 loss included $78.8 million in impairment of intangible asset charges. Income from continuing operations amounted to $7.6 million in 2004 in comparison to $51.9 million in 2003 but the prior year's results included $54.1 million in gains on debt restructuring and settlements while 2004 included only $1.0 million in such gains. Inclusive of the impairment charges, the net loss in 2002 amounted to $(85.8) million. 28 We have heightened our efforts to increase revenues from Transaction Management Services during the fourth quarter of 2004 and during 2005 to date by hiring additional sales and marketing personnel and undertaking certain promotional programs. While other costs have been reduced, we expect that our overall results for 2005 will be negatively impacted by this effort and we expect that results for the year will fall short of 2004's results. Furthermore, we will record approximately $1.6 million of charges, net of taxes, in 2005 for the separation agreement with our former President of the International division and severance expenses related to restructuring certain operations. Our prospects should be considered in light of risks described in the section of this report entitled "Risk Factors That May Affect Future Results." CRITICAL ACCOUNTING POLICIES In response to the Securities & Exchange Commission's (SEC) Release No. 33-8040, "Cautionary Advice Regarding Disclosure About Critical Accounting Policies," we have identified the most critical accounting principles upon which our financial status depends. Critical principles were determined by considering accounting policies that involve the most complex or subjective decisions or assessments. The most critical accounting policies were identified to be those related to accounts receivable, long-lived assets and intangible assets, contingencies and litigation, and restructurings. ACCOUNTS RECEIVABLE We perform ongoing credit evaluations of our customers and adjust credit limits based upon payment history and the customer's current credit worthiness, as determined by a review of their current credit information. We continuously monitor collections and payments from our customers and maintain a provision for estimated credit losses based upon historical experience and any specific customer collection issues that have been identified. While such credit losses have historically been within our expectations and the provisions established, we cannot guarantee that we will continue to experience the same credit loss rates that have been experienced in the past. IMPAIRMENT OF LONG-LIVED ASSETS Effective January 1, 2002, we adopted SFAS No. 142, "Goodwill and Other Intangible Assets" and SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets". SFAS 142 eliminates the amortization of goodwill and indefinite-lived intangible assets, addresses the amortization of intangible assets with finite lives and addresses impairment testing and recognition for goodwill and indefinite-lived intangible assets. SFAS No. 144 establishes a single model for the impairment of long-lived assets. We assess goodwill and indefinite-lived intangibles for impairment annually unless events occur that require more frequent reviews. Long-lived assets, including amortizable intangibles, are tested for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Discounted cash flow analyses are used to assess indefinite-lived intangible impairment while undiscounted cash flow analyses are used to assess long-lived asset impairment. If an assessment indicates impairment, the impaired asset is written down to its fair market value based on the best information available. Estimated fair market value is generally measured with discounted estimated future cash flows. Considerable management judgment is necessary to estimate undiscounted and discounted future cash flows. Assumptions used for these cash flows are consistent with internal forecasts. On an on-going basis, management reviews the value and period of amortization or depreciation of long-lived assets, including goodwill and other intangible assets. During this review, we reevaluate the significant assumptions used in determining the original cost of long-lived assets. Although the assumptions may vary from transaction to transaction, they generally include revenue growth, operating results, cash flows and other indicators of value. Management then determines whether there has been an impairment of the value of long-lived assets based upon events or circumstances, which have occurred since acquisition. The impairment policy is consistently applied in evaluating impairment for each of the Company's wholly owned subsidiaries and investments. CONTINGENCIES AND LITIGATION We evaluate contingent liabilities including threatened or pending litigation in accordance with SFAS No. 5, "Accounting for Contingencies" and record accruals when the outcome of these matters is deemed probable and the liability is reasonably estimable. We make these assessments based on the facts and circumstances and in some instances based in part on the advice of outside legal counsel. RESTRUCTURING ACTIVITIES Restructuring activities are accounted for in accordance with SFAS No. 146 and, in 2003 and 2002, relate to the relocation and consolidation of our New Jersey office facilities into one location and a similar consolidation of our office facilities in England. The restructuring charges are comprised of abandonment costs with respect to leases, including the write-off of leasehold improvements. We continually evaluate the amounts established in the restructuring reserve so that amounts originally recorded in 2002 were increased in 2003 based on market conditions for subleasing the abandoned facilities. In 2004, mostly due to a settlement of liability related to one of our abandoned locations, $350,000 of restructuring charges was reversed. Our obligations for the remaining abandoned locations terminate in September 2005 and February 2006. RESULTS OF OPERATIONS - 2004, 2003 AND 2002 PERCENT CHANGE ------------------- 2004 2003 2004 2003 2002 VS. 2003 VS. 2002 ---- ---- ---- -------- -------- Revenues............................................ $91,840 $101,347 $114,354 (9.4)% (11.4)% Cost of revenues ................................... 36,725 49,553 57,601 (25.9)% (14.0)% ------- ------ ------ ------- ------- Gross Margin .................................... 55,115 51,794 56,753 6.4% (8.7)% % of Revenue................................... 60% 51% 50% Operating expenses: Sales and marketing ................................ 18,715 18,379 20,151 1.8% (8.8)% General and administrative.......................... 23,794 24,405 28,694 (2.5)% (14.9)% Product development................................. 6,730 6,383 7,412 5.4% (13.9)% Amortization of intangible assets................... 2,066 2,066 6,751 ---- (69.4)% Impairment of intangible assets .................... 500 --- 78,784 Restructuring charges (credits)..................... (350) 1,478 2,320 Gain on sale of businesses/MailWatch service line... (5,017) --- (426) ------- ------ ---- 46,438 52,711 143,686 ------- INCOME (LOSS) FROM OPERATIONS....................... 8,677 (917) (86,933) Other income (expense), net: Gain on debt restructuring and settlements.......... 984 54,078 6,558 Interest income (expense), net ..................... (447) (1,354) (4,596) Other............................................... 288 79 (874) ------- ------- -------- 825 52,803 1,088 INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME TAXES....................................... 9,502 51,886 (85,845) Provision for income taxes.......................... 1,900 --- --- ------ ------- ------- INCOME (LOSS) FROM CONTINUING OPERATIONS............ 7,602 51,886 (85,845) ====== ======= ======= RESULTS OF OPERATIONS - 2004 AND 2003 REVENUES Revenues in 2004 were $91.8 million as compared to $101.3 million in 2003. The decrease of $9.5 million was due primarily to reduced revenues in our Transaction Delivery services, as a result of lower volumes and negotiated individual customer price reductions and loss of certain customers and $2.2 million in lower MailWatch revenues as a result of the sale of this service line on July 31, 2004. The reduced revenues were partially offset by a $4.0 million increase in Transaction Management services. We anticipate that our revenues derived from our Transaction Delivery services will continue to decline, while our Transaction Management services revenue is expected to increase in 2005. 29 COST OF REVENUES Cost of revenues for 2004 decreased to $36.7 million from $49.6 million in 2003. As a percentage of revenues these costs decreased to 40% in 2004 as compared to 49% in 2003. Cost of revenue reflects a decrease in costs as a percentage of revenue equal to 3% due to depreciation charges and decrease in other costs as a percentage of revenues equal to 8%. Reduction in other costs include savings from continuing cost reduction programs in network operations, lower telecom rates, favorable settlement dispute, reductions in facilities, including reducing the number of circuits, and reduced variable telecom charges consistent with reduced customer volumes. Cost of revenues consists primarily of costs incurred in the delivery and support of our services, including depreciation of equipment used in our computer systems, software license costs, tele-housing costs, the cost of telecommunications services including local access charges, leased network backbone circuit costs and long distance domestic and international termination charges, and personnel costs associated with our systems and databases. SALES AND MARKETING EXPENSES Sales and marketing expenses increased to $18.7 million from $18.4 million in 2003. The increased expense relates to our increased staff and promotional program spending particularly in the latter part of 2004, to expand Transaction Management services. We expect these expenses to continue at the increased levels throughout 2005 and for total sales and marketing costs to be higher than that of 2004. GENERAL AND ADMINISTRATIVE EXPENSES General and administrative expenses were $23.8 million in 2004 as compared to $24.4 million in 2003. While certain cost components may vary, we anticipate general and administrative expenses in total to be comparable to 2004 levels. PRODUCT DEVELOPMENT EXPENSES Product development costs, which consist primarily of personnel and consultants' time and expense to research, conceptualize, and test product launches and enhancements to our products, were $6.7 million for 2004 as compared to $6.4 million in 2003. We anticipate that spending for product development will increase over 2004 in connection with the expansion of the development of the new Transaction Management services and the continuing development of other services. RESTRUCTURING CHARGES During the year ended December 31, 2003, the Company recorded additional restructuring charges of $1.5 million for net abandonment costs on U.S. leases as estimated sublease rentals were reduced due to deteriorating market conditions for subleasing the vacant facilities and a negotiated settlement of lease obligations in England. During 2004 these estimates were revised again, largely due to a favorable negotiated settlement of liability on one lease, resulting in the reversal of restructuring charges of $350,000. AMORTIZATION OF INTANGIBLE ASSETS As of January 1, 2002, the Company adopted FASB No. 142, "Goodwill and Other Intangibles". Statement No. 142 requires companies to no longer amortize goodwill but instead to test goodwill for impairment on an annual basis. Accordingly, we did not amortize any goodwill during the years ended December 31, 2004 and 2003 respectively. We completed an impairment assessment in the 4th quarter of 2004 with the assistance of an independent appraiser and determined that an impairment of trademarks had occurred. Accordingly we recorded a $500,000 charge in 2004. The value of the trademark is based upon the company's ability to continue to generate revenues at comparable levels and based upon certain other assumptions. Significant declines in revenues or changes in assumptions could negatively impact the value of the trademark. Our annual assessment for 2003 did not result in any impairment. 30 INTEREST INCOME (EXPENSE), NET Interest income for 2004 was $70,000 as compared to $36,000 during 2003. The increase was due to higher cash balances available for temporary investment. Interest expense was $517,000 in 2004 as compared to $1.4 million in 2003. The decrease was primarily due to reductions in the total debt balances outstanding as a result of the debt restructurings and settlements completed in 2003 and principal amortization in 2004. GAIN ON DEBT RESTRUCTURINGS AND SETTLEMENTS In December 2004 we paid off all of the Company's previously existing secured debt with part of the proceeds of a new $12 million Term Loan from Wells Fargo. As a result, we recorded a gain of $1.0 million from the reversal of interest previously capitalized related to the retired debt. During 2003, we eliminated $63.0 million of indebtedness in exchange for the payment of $3.1 million in cash and the issuance of 23.9 million shares of Class A common stock valued at $13.6 million pursuant to our announced efforts to eliminate substantially all of our outstanding indebtedness. After reversing $6.5 million of previously capitalized interest and $2.4 million of accrued interest net of debt issuance costs, we recorded total gains of $54.1 million on these transactions. The elimination of outstanding debt in 2003 resulted in substantial income from cancellation of debt for income tax purposes. We intend to minimize the income tax payable as a result of the restructuring by, among other things, offsetting the income with our historical net operating losses and otherwise reducing the income in accordance with applicable income tax rules. We do not expect to incur any material current income tax liability from the elimination of this debt, although the relevant tax authorities may challenge our income tax positions. RESULTS OF OPERATIONS - 2003 AND 2002 REVENUES Revenues in 2003 were $101.3 million as compared to $114.4 million in 2002. The decrease of $13.1 million was due primarily to reduced revenues in our production messaging services, which include fax, telex and email hosting, as a result of lower volumes and negotiated individual customer price reductions and loss of certain customers. Revenues consist almost entirely of revenues from providing information exchange services to businesses and are derived from electronic data interchange services or "EDI"; production messaging services; integrated desktop messaging services; boundary and managed email services; and other services. COST OF REVENUES Cost of revenues for 2003 decreased to $49.6 million from $57.6 million in 2002. As a percentage of revenues these costs decreased to 48.9% in 2003 as compared to 50.0% in 2002. However, the 2003 costs are net of a $1.2 million (1.2% of revenues) reversal of previously accrued telecom costs as a result of a negotiated agreement with one of the company's providers. Without the reversal, costs as a percentage of revenue would have remained unchanged at 50%. Cost of revenue reflects a decrease in costs as a percentage of revenue equal to 2% due to depreciation charges and an increase in other costs as a percentage of revenues equal to 2% due to fixed network expenses and fixed telecom expenses. Reductions in costs from continuing cost reduction programs in network operations, telecom rates, reductions in facilities, including reducing the number of circuits, and reduced variable telecom charges consistent with reduced customer volumes also reduced total 2003 costs in comparison to 2002. Cost of revenues consists primarily of costs incurred in the delivery and support of our services, including depreciation of equipment used in our computer systems, the cost of telecommunications services including local access charges, leased network backbone circuit costs and long distance domestic and international termination charges, and personnel costs associated with our systems and databases. SALES AND MARKETING EXPENSES Sales and marketing expenses were $18.4 million and $20.2 million in 2003 and 2002, respectively. Included in this category are costs related to salaries and commissions for sales, marketing, and business development personnel. Also included are costs for promotional programs, trade shows and marketing materials. The cost decrease of $1.8 million is primarily the result of lower staffing levels in 2003. 31 GENERAL AND ADMINISTRATIVE EXPENSES General and administrative expenses were $24.4 million in 2003 as compared to $28.7 million in 2002. The $4.3 million decrease is the net impact of various cost component changes but the most significant reduction was $2.6 million in our provision for bad debts as a result of improved collection and credit activities. PRODUCT DEVELOPMENT EXPENSES Product development costs, which consist primarily of personnel and consultants' time and expense to research, conceptualize, and test product launches and enhancements to our products, were $6.4 million for 2003 as compared to $7.4 million in 2002. The net decrease in costs mostly relates to lower consultants costs and lower salaries attributable to fewer employees. RESTRUCTURING CHARGES During the year ended December 31, 2002, restructuring charges of $2.3 million were recorded by the Company. The Company's restructuring initiatives are related to the relocation and consolidation of its New Jersey office facilities into one location which was completed in 2003 and a similar consolidation of facilities for our operations in England. The restructuring charges are comprised of net abandonment cost with respect to leases and the write-off of leasehold improvements. During the year ended December 31, 2003, the Company recorded additional restructuring charges of $1.5 million for net abandonment costs on U.S. leases as estimated sublease rentals were reduced due to deteriorating market conditions for subleasing the vacant facilities and a negotiated settlement of lease obligations in England. GAIN ON SALE OF BUSINESS In 2002, the Company recorded a $300,000 gain attributable to the sale of customer contracts for hosted email services (NIMS) and a $126,000 gain attributable to the sale of a software and consulting business in Europe. AMORTIZATION OF OTHER INTANGIBLE ASSETS As of January 1, 2002, the Company adopted FASB No. 142, "Goodwill and Other Intangibles". Statement No. 142 requires companies to no longer amortize goodwill but instead to test goodwill for impairment on an annual basis. Accordingly, we did not amortize any goodwill during the years ended December 31, 2003 and 2002 respectively. We completed an impairment assessment in the 4th quarter of 2002 with the assistance of an independent appraiser and determined that an impairment of goodwill had occurred. Based on a subsequent fair value analysis of the Company's goodwill, other intangible assets and other long-lived assets, we recorded an aggregate impairment of $78.8 million in the 4th quarter of 2002. The impairment of the other intangible assets reduced the basis for future amortization charges resulting in the $4.7 million decrease in amortization charges for 2003 in comparison to 2002. Total charges are $2.1 million and $6.8 million in 2003 and 2002, respectively. OTHER INCOME (EXPENSE), NET Interest income for 2003 was $36,000 as compared to $189,000 during 2002. The decrease was due to lower cash balances and lower interest rates on temporary investments. Interest expense was $1.4 million in 2003 as compared to $4.8 million in 2002. The decrease was primarily due to reductions in the total debt balances outstanding as a result of the debt restructurings and settlements completed in 2003 and 2002. GAIN ON DEBT RESTRUCTURINGS AND SETTLEMENTS During 2003, we eliminated $63.0 million of indebtedness in exchange for the payment of $3.1 million in cash and the issuance of 23.9 million shares of Class A common stock valued at $13.6 million pursuant to our announced efforts to eliminate substantially all of our outstanding indebtedness. After reversing $6.5 million of previously capitalized interest and $2.4 million of accrued interest net of debt issuance costs, we recorded total gains of $54.1 million on these transactions. In 2002, we eliminated $5.5 million of indebtedness in exchange for the payment of $0.6 million in cash and the issuance of 5,415 shares of Class A common stock valued at $6,000 pursuant to our announced efforts to eliminate substantially all of our outstanding indebtedness. After reversing $1.7 million of previously capitalized interest, we recorded a gain of $6.6 million on these transactions 32 The elimination of outstanding debt resulted in substantial income from cancellation of debt for income tax purposes. We intend to minimize the income tax payable as a result of the restructuring by, among other things, offsetting the income with our historical net operating losses and otherwise reducing the income in accordance with applicable income tax rules. We do not expect to incur any material current income tax liability from the elimination of this debt, although the relevant tax authorities may challenge our income tax positions. LOSS FROM DISCONTINUED OPERATIONS In September 2003, a previously vacated judgment in the amount of $931,000 was reinstated against the Company in connection with the Company's suit against a broker engaged by the Company in connection with the proposed sale of the portal operations of its discontinued India.com business and the broker's counterclaim against the company. The judgment and related costs, net of previously recorded reserves, is reflected as the loss from discontinued operations in 2003 Consolidated Statement of Operations. See Note 17 - Commitments and Contingencies - Legal Proceedings for additional information. LIQUIDITY AND CAPITAL RESOURCES We have significantly improved our financial condition in 2004 and 2003 by (1) reducing operating costs by consolidating operations and other cost reduction programs; (2) restructuring our debt obligations and entering into a new credit financing with Wells Fargo; and (3) selling our non-core domain assets and our MailWatch service line. At December 31, 2004 our cash and cash equivalents amounted to $12.3 million, a $5.7 million increase in comparison to balances on hand at December 31, 2003. Our working capital deficit at year end 2004 was $378,000 in comparison to $11.8 million at December 31, 2003 and $19.6 million at December 31, 2002. In addition, our stockholders equity reached $13.0 million at December 31, 2004 from $4.4 million at December 31, 2003 and from a deficit of $61.8 million at December 31, 2002. In December 2004 we entered into an agreement with Wells Fargo Foothill, Inc., a subsidiary of Wells Fargo, for a credit facility of $15 million, including a $12 million term loan. We used $9.5 million of the proceeds from the term loan to pay off all our secured debt, which included a scheduled balloon payment of $5.8 million in June 2006, in December 2004 and we used an additional $1.4 million of proceeds to pay off subordinated debt in February 2005. The Wells Fargo term loan is repayable at $200,000 per month for 60 months although there are mandatory prepayments under certain conditions. The credit facility also provides for other advances of $3 million initially, but increasing to $7.5 million upon our meeting certain conditions. We borrowed approximately $1 million of advances in March 2005 for working capital purposes. See Note 7 - Loans and Notes Payable for a description of the Wells Fargo Foothill credit facility. We believe our current cash and cash equivalent balances, the availability of funds under the credit facility and cash from operations will provide adequate funds for operating and other planned expenditures and debt service, including the expansion of our sales and marketing force and our capital spending programs, for at least the next twelve months. Cash provided from operations amounted to $6.3 million and $7.7 million for the years ended December 31, 2004 and 2003, respectively. Although we anticipate that our operating results for 2005 will approximate these levels, we expect to increase spending for capital expenditures requiring the use of available funds. We estimate spending $6.0 million for capital expenditures in 2005, mostly related to the build out of a new network center at our corporate office location in Piscataway, NJ and the migration of customer messaging to the new facility from a leased AT&T location. The new network installation is expected to result in reduced network operating costs once the migration is completed in the first quarter of 2006. Capital expenditures amounted to $3.6 million (including $0.6 million under capital leases) in 2003 and $4.2 million in 2002. Other major uses of cash in 2005 are approximately $4.0 million in payments of principal on our outstanding debt. The 2005 principal payments consist of the payment of $1.4 million on February 1, 2005 for the maturity of the remaining 7% convertible subordinated notes and the monthly amortization of the new $12 million term loan from Wells Fargo. The covenants of the credit facility restrict the amount of our capital expenditures to $6.0 million in 2005 and $4.0 million per year thereafter. The Company did not meet the $3 million limitation on capital expenditures in 2004; however, Wells Fargo granted a waiver of the covenant. The credit facility also requires that our operations have minimum EBITDA results on a quarterly and annual basis. On March 31, 2005, the Company and Wells Fargo reached an agreement to modify the EBITDA covenant calculation to exclude from the calculation the amount of the George Abi Zeid settlement charges of $2.475 million. Failure to comply with these minimum requirements could result in the acceleration of the payment of the term loan as well as any future revolving credit advances made under the agreement. The credit facility also restricts the incurrence of indebtedness. The Company currently expects to be in compliance with its covenant requirements, as revised, during the year ending December 31, 2005. For each of the years ended December 31, 2004, 2003 and 2002, we received a report from our independent auditors containing an explanatory paragraph stating that we have a working capital deficiency and an accumulated deficit that raises substantial doubt about our ability to continue as a going concern. Management's plans in regard to this matter are described in Note 1(b). Our consolidated financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that might be necessary should we be unable to continue as a going concern. If the Company's cash flow is not sufficient, we may need additional financing to meet our debt service and other cash requirements. However, if we are unable to raise additional financing, restructure or settle additional outstanding debt or generate sufficient cash flow, we may be unable to continue as a going concern. Management believes the Company's ability to continue as a going concern is dependent upon its ability to generate sufficient cash flow to meet its obligations on a timely basis, to obtain additional financing or refinancing as may be required, and to maintain profitable operations. Throughout 2002, 2003 and 2004, management improved the Company's operations through cost reductions resulting in net cash from operations of $2.2 million, $7.7 million and $6.3 million, respectively, for those years. During those years, the Company reduced its working capital deficit to $19.6 million at year end 2002, to $11.8 million at year end 2003 and to $378,000 at year end 2004. During 2003, the Company reduced its debt by $63.0 million. In December, 2004, the Company refinanced its remaining secured debt through a new credit facility with Wells Fargo Foothill, Inc. Management is continuing the process of further reducing telecommunications and network-related operating costs while increasing its sales and marketing efforts. There can be no assurance that the Company will be successful in these efforts. CONTRACTUAL OBLIGATIONS Below is a table that presents our contractual obligations and commitments at December 31, 2004: 33 Payments due by period (in thousands) LESS THAN AFTER TOTAL ONE YEAR 1-3 YEARS 4-5 YEARS 5 YEARS --------- --------- --------- --------- ------- Long-term debt obligations $13,425 $ 3,825 $ 4,800 $ 4,800 - Operating lease obligations 12,917 2,917 3,760 2,476 $ 3,764 Purchase obligations mostly consisting of telecommunication contract commitments 4,521 4,080 441 - - Other long term liabilities 211 - 211 - - --------- --------- -------- ------- ------- $ 31,074 $ 10,822 $ 9,212 $ 7,276 $ 3,764 We do not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial position, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to investors. RECENT ACCOUNTING PRONOUNCEMENTS In December 2004, the Financial Accounting Standards Board ("FASB") issued SFAS 123 (revised 2004), "Share-Based Payment" (SFAS 123(R)) which replaces SFAS 123, "Accounting for Stock-Based Compensation," and supersedes APB Opinion No. 25, "Accounting for Stock Issued to Employees. Among other items, SFAS 123(R) eliminates the use of APB 25 and the intrinsic method of accounting, and requires all share-based payments, including grants of employee stock options, to be recognized in the financial statements based on their fair values. SFAS 123(R) is effective for public companies beginning with the first interim period that begins after June 15, 2005. The Company will adopt SFAS 123(R) in 2005 and in accordance with its provisions will recognize compensation expense for all share-based payments and employee stock options based on the grant-date fair value of those awards. The Company is currently evaluating the impact of the statement on its financial statements. See Note 1 (p) for the proforma effect of SFAS 123. In December 2004, the FASB issued FSP FAS 109-2, "Accounting and Disclosure Guidance for the Foreign Earnings Repatriation Provision within the American Jobs Creation Act of 2004". The American Jobs Creation Act of 2004 introduces a special one-time dividends received deduction on the repatriation of certain foreign earnings to a U.S. taxpayer (repatriation provision), provided certain criteria are met. FSP FAS 109-2 gives a company additional time to evaluate the effects of the legislation on any plan for reinvestment or repatriation of foreign earnings for purposes of applying SFAS No. 109, Accounting for Income Taxes. The deduction is subject to a number of limitations, and uncertainty remains as to how to interpret numerous provisions in the Act. As such, the Company is not in a position to decide on whether, and to what extent, it might repatriate foreign earnings that have not yet been remitted to the U.S. based on its analysis to date. The Company expects to be in a position to finalize its assessment by December 31, 2005. 34 ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company is exposed to market risk, primarily from changes in interest rates, foreign exchange rates and credit risk. The Company maintains continuing operations in Europe (mostly in the United Kingdom) and, to a lesser extent, in Singapore, Malaysia and India. Fluctuations in exchange rates may have an adverse effect on the Company's results of operations and could also result in exchange losses. The impact of future rate fluctuations cannot be predicted adequately. To date the Company has not sought to hedge the risks associated with fluctuations in exchange rates. Market Risk - Our accounts receivable are subject, in the normal course of business, to collection risks. We regularly assess these risks and have established policies and business practices to protect against the adverse effects of collection risks. As a result we do not anticipate any material losses in this area. Interest Rate Risk - Interest rate risk refers to fluctuations in the value of a security resulting from changes in the general level of interest rates. Investments that are classified as cash and cash and equivalents have original maturities of three months or less. Changes in the market's interest rates do not affect the value of these investments. 35 ITEM 8 CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA EASYLINK SERVICES CORPORATION INDEX TO CONSOLIDATED FINANCIAL STATEMENTS PAGE Independent Registered Public Accountants' Report.................................................... 37 Consolidated Balance Sheets as of December 31, 2004 and 2003......................................... 38 Consolidated Statements of Operations for the years ended December 31, 2004, 2003, and 2002.......... 39 Consolidated Statements of Stockholders' Equity (Deficit) and Comprehensive Income (Loss) for the years ended December 31, 2004, 2003 and 2002...................................... 40 Consolidated Statements of Cash Flows for the years ended December 31, 2004, 2003 and 2002........... 44 Notes to Consolidated Financial Statements........................................................... 46 36 INDEPENDENT REGISTERED PUBLIC ACCOUNTANTS' REPORT The Board of Directors EasyLink Services Corporation: We have audited the accompanying consolidated balance sheets of EasyLink Services Corporation and subsidiaries as of December 31, 2004 and 2003, and the related consolidated statements of operations, stockholders' equity (deficit) and comprehensive income (loss), and cash flows for each of the years in the three-year period ended December 31, 2004. 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 audits. We conducted our audits in accordance with the auditing 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 audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of EasyLink Services Corporation and subsidiaries as of December 31, 2004 and 2003, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2004 in conformity with US generally accepted accounting principles. The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1(b) to the consolidated financial statements, the Company has a working capital deficiency and an accumulated deficit that raises substantial doubt about its ability to continue as a going concern. Management's plans in regard to this matter are also described in Note 1(b). The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty. /s/KPMG LLP New York, New York April 11, 2005 37 EasyLink Services Corporation CONSOLIDATED BALANCE SHEETS (In thousands, except share and per share data) DECEMBER 31, 2004 2003 --------- --------- ASSETS Current assets: Cash and cash equivalents.......................................................... $12,300 $ 6,623 Marketable securities.............................................................. 2,023 -- Accounts receivable, net of allowance for doubtful accounts of $3,950 and $4,824 as of December 31, 2004 and 2003, respectively.......................... 9,624 11,430 Prepaid expenses and other current assets.......................................... 2,578 1,760 --------- --------- Total current assets............................................................... 26,525 19,813 --------- --------- Property and equipment, net........................................................ 8,125 10,641 Goodwill, net...................................................................... 6,266 6,266 Other intangible assets, net....................................................... 8,846 11,629 Other assets....................................................................... 764 1,062 --------- --------- Total assets....................................................................... $50,526 $49,411 ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable................................................................... $ 6,523 $ 9,082 Accrued expenses................................................................... 13,891 14,336 Restructuring reserves payable..................................................... 728 1,894 Current portion of notes payable................................................... 3,825 2,957 Current portion of capitalized interest on notes payable........................... -- 1,040 Other current liabilities.......................................................... 1,408 1,438 Net liabilities of discontinued operations......................................... 528 828 --------- --------- Total current liabilities.......................................................... 26,903 31,575 --------- --------- Notes payable, less current portion................................................ 9,600 10,511 Capitalized interest on notes payable, less current portion........................ -- 956 Other long term liabilities........................................................ 975 1,957 --------- --------- Total liabilities.................................................................. 37,478 44,999 --------- --------- Stockholders' equity: Common stock, $0.01 par value; 510,000,000 shares authorized at December 31, 2004 and 2003: Class A--500,000,000 shares authorized at December 31, 2004 and 2003, 44,174,459 and 42,821,500 shares issued and outstanding at December 31, 2004 and 2003, respectively.................................... 441 428 Class B--10,000,000 shares authorized at December 31, 2004 and 2003, 0 and 1,000,000 issued and outstanding at December 31, 2004 and 2003, respectively ................................... -- 10 Additional paid-in capital......................................................... 553,420 552,589 Accumulated other comprehensive loss............................................... (72) (272) Accumulated deficit................................................................ (540,741) (548,343) --------- --------- Total stockholders' equity......................................................... 13,048 4,412 --------- --------- Commitments and contingencies Total liabilities and stockholders' equity......................................... $50,526 $49,411 ========= ========= See accompanying notes to consolidated financial statements. 38 EasyLink Services Corporation CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands, except share and per share data) YEAR ENDED DECEMBER 31, -------------------------------------- 2004 2003 2002 ---------- -------- --------- Revenues.......................................................... $91,840 $101,347 $114,354 Operating expenses: Cost of revenues.............................................. 36,725 49,553 57,601 ---------- -------- --------- Gross profit...................................................... 55,115 51,794 56,753 ---------- -------- --------- Sales and marketing............................................... 18,715 18,379 20,151 General and administrative........................................ 23,794 24,405 28,694 Product development............................................... 6,730 6,383 7,412 Amortization of intangible assets................................. 2,066 2,066 6,751 Impairment of intangible assets................................... 500 -- 78,784 Restructuring charges (credits)................................... (350) 1,478 2,320 Gain on sale of businesses/Mailwatch service line................. (5,017) -- (426) ---------- -------- --------- 46,438 52,711 143,686 ---------- -------- --------- Income (loss) from operations..................................... 8,677 (917) (86,933) --------- -------- --------- Other income (expense): Interest income............................................... 70 36 189 Interest expense.............................................. (517) (1,390) (4,785) Gain on debt restructuring and settlements.................... 984 54,078 6,558 Impairment of investments..................................... -- -- (1,515) Other, net.................................................... 288 79 641 ---------- -------- --------- Total other income, net........................................... 825 52,803 1,088 ---------- -------- --------- Income from continuing operations before income taxes............. 9,502 51,886 (85,845) Provision for income taxes........................................ 1,900 -- -- ---------- --------- --------- Income (loss) from continuing operations.......................... 7,602 51,886 (85,845) ---------- --------- --------- Loss from discontinued operations................................. -- (938) -- ---------- -------- --------- Net income (loss)................................................. $7,602 $50,948 $(85,845) ========== ======== ========= Basic net income (loss) per share: Income (loss) from continuing operations.......................... $0.17 $1.47 $(5.13) Loss from discontinued operations................................. -- (0.03) -- ---------- -------- --------- Basic net income (loss) per share................................. $0.17 $1.44 $(5.13) ========== ======== ========= Diluted net income (loss) per share: Income (loss) from continuing operations.......................... $0.17 $1.46 $(5.13) Loss from discontinued operations................................. -- (0.03) -- ---------- -------- --------- Diluted net income (loss) per share............................... $0.17 $1.43 $(5.13) ========== ======== ========= Weighted-average basic shares outstanding 44,004,271 35,401,809 16,732,793 ========== ========== ========== Weighted-average diluted shares outstanding....................... 44,891,039 35,653,336 16,732,793 ========== ========== ========== See accompanying notes to consolidated financial statements. 39 EasyLink Services Corporation Consolidated Statement of Stockholders' Equity (Deficit) and Comprehensive Income (Loss) (in thousands, except share data) CLASS A COMMON CLASS B COMMON STOCK STOCK ADDITIONAL ------------------ ------------------ PAID-IN SHARES AMOUNT SHARES AMOUNT CAPITAL ----------- -------- -------- -------- ---------- Balance at December 31, 2001 14,580,211 $146 1,000,000 $10 $533,878 Net loss - - - - - Cumulative foreign currency translation - - - - - Comprehensive loss - - - - - Issuance of Class A common stock in connection with 401(k) plan 314,642 3 - - 434 Issuance of Class A common stock to certain employees - - - - - Issuance of Class A common stock in connection with employee terminations 19,265 - - - 84 Issuance of Class A common stock in connection with private placement 100,000 1 - - (1) Issuance of Class A common stock in connection with MyIndia.com contingent liability 6,534 - - - 6 Issuance of Class A common stock in connection with MyIndia.com sale 56,075 1 - - 314 Issuance of Class A common stock in connection with vendor settlements 106,534 1 - - 103 Issuance of Class A common stock issued to Lohoo 36,232 - - - 203 Issuance of Class A common stock to third party vendors 21,016 - - - 78 Issuance of Class A common stock in lieu of cash interest on debt 888,810 9 - - 1,821 Interest expense related to Senior Convertible notes payable in common stock - - - - 330 Interest expense related to Capitalized Interest - - - - 294 ----------- -------- --------- -------- ---------- Balance at December 31, 2002 16,129,319 $161 1,000,000 $10 $537,544 =========== ======== ========= ======== ========== See accompanying notes to consolidated financial statements. 40 ACCUMULATED TOTAL OTHER STOCKHOLDERS' DEFERRED COMPREHENSIVE ACCUMULATED (DEFICIT)/ COMPENSATION LOSS DEFICIT EQUITY ------------ ------------ ----------- ------------ Balance at December 31, 2001 $(42) $(37) $(513,446) $20,509 Net loss - - (85,845) (85,845) Cumulative foreign currency translation - (209) - (208) ------------ ------------ ----------- ------------ Comprehensive loss - (209) (85,845) (86,054) ------------ ------------ ----------- ------------ Issuance of Class A common stock in connection with 401(k) plan - - - 437 Issuance of Class A common stock to certain employees 42 - - 42 Issuance of Class A common stock in connection with employee termination - - - 84 Issuance of Class A common stock in connection with MyIndia.com contingent liability - - - 6 Issuance of Class A common stock in connection with MyIndia.com sale - - - 315 Issuance of Class A common stock in connection with vendor settlements - - - 104 Issuance of Class A common stock issued to Lohoo - - - 203 Issuance of Class A common stock to third party vendors - - - 78 Issuance of Class A common stock in lieu of cash interest on debt - - - 1,830 Interest expense related to Senior Convertible Notes payable in common stock - - - 330 Interest expense related to Capitalized Interest - - - 294 ------------ ------------ ----------- ------------ Balance at December 31, 2002 - $(246) $(599,291) $(61,822) ============ ============ =========== ============ See accompanying notes to consolidated financial statements. 41 EasyLink Services Corporation Consolidated Statement of Stockholders' Equity (Deficit) and Comprehensive Income (Loss) (in thousands, except share data) (continued) CLASS A COMMON CLASS B COMMON STOCK STOCK ADDITIONAL ---------------------- ----------------------- PAID-IN SHARES AMOUNT SHARES AMOUNT CAPITAL ---------- ------ --------- ------- ---------- Balance at December 31, 2002 16,129,319 $161 1,000,000 $10 $537,544 Net income - - - - - Cumulative foreign currency translation - - - - - Comprehensive income - - - - - Issuance of Class A common stock in connection with 401(k) plan 531,545 5 - - 486 Issuance of Class A common stock in connection with private placement 1,923,077 19 - - 981 Issuance of Class A common stock in connection with cancellation of debt 23,881,705 239 - - 13,328 Issuance of Class A common stock in lieu of cash interest on debt 284,304 3 - - 181 Proceeds from the exercise of stock options 71,550 1 - - 69 ---------- ------ --------- ------- ---------- Balance at December 31, 2003 42,821,500 $428 1,000,000 $10 $552,589 Net income - - - - - Unrealized holding gains on marketable securities - - - - - Cumulative foreign currency translation - - - - - Comprehensive income - - - - - Issuance of Class A common stock in connection with 401(k) plan 273,129 3 - - 397 Issuance of Class A common stock in connection with employee terminations - - - - 150 Issuance of Class A common stock in lieu of cash interest on debt 35,530 - - - 48 Proceeds from the exercise of stock options 44,300 - - - 32 Conversion of Class B common stock to Class A common stock 1,000,000 10 (1,000,000) (10) - Other - - - - 204 ---------- ------ --------- ------- ---------- Balance at December 31, 2004 44,174,459 $441 - $ - $553,420 ========== ====== ========= ======= ========== See accompanying notes to consolidated financial statements. 42 ACCUMULATED TOTAL OTHER STOCKHOLDERS' DEFERRED COMPREHENSIVE ACCUMULATED (DEFICIT)/ COMPENSATION LOSS DEFICIT EQUITY ------------ ------------- ----------- ------------- Balance at December 31, 2002 $ - $(246) $(599,291) $(61,822) Net income - - 50,948 50,948 Cumulative foreign currency translation - (26) - (20) ------------ ------------- ----------- ------------- Comprehensive income - (26) 50,948 50,928 ------------ ------------- ----------- ------------- Issuance of Class A common stock in connection with 401(k) plan - - - 492 Issuance of Class A common stock in connection with private placement - - - 1,000 Issuance of Class A common stock in connection with cancellation of debt - - - 13,567 Issuance of Class A common stock in lieu of cash interest on debt - - - 184 Proceeds from the exercise of stock options - - - 70 ------------ ------------- ----------- ------------- Balance at December 31, 2003 - $(272) $(548,343) $4,412 Net income - - 7,602 7,602 Unrealized holding gains on marketable securities - 529 - 529 Cumulative foreign currency translation - (329) - (329) ------------ ------------- ----------- ------------- Comprehensive income - 200 7,602 7,802 ------------ ------------- ----------- ------------- Issuance of Class A common stock in connection with 401(k) plan - - - 400 Issuance of Class A common stock in connection with employee termination - - - 150 Issuance of Class A common stock in lieu of cash interest on debt - - - 48 Proceeds from the exercise of stock options - - - 32 Conversion of Class B common stock to Class A common stock - - - - Other - - - 204 ------------ ------------- ----------- ------------- BALANCE AT DECEMBER 31, 2004 - $(72) $(540,741) $13,048 ============ ============= =========== ============= See accompanying notes to consolidated financial statements. 43 EasyLink Services Corporation CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) YEAR ENDED DECEMBER 31, ------------------------------------- 2004 2003 2002 --------- --------- --------- Cash flows from operating activities: Net income (loss).............................................. $ 7,602 $50,948 $(85,845) Adjustments to reconcile net income (loss) to net cash provided by operating activities: Loss from discontinued operations.............................. - 938 - Depreciation and amortization.................................. 4,987 8,295 10,417 Amortization of goodwill and other intangible assets........... 2,686 2,919 8,039 Non-cash interest.............................................. 48 184 1,830 Provision for doubtful accounts................................ 410 1 2,596 Provision for restructuring charges (credits).................. (350) 1,478 2,320 Gain on debt restructuring and settlements..................... (984) (54,078) (6,558) Issuance of shares as matching contributions to employee benefit plans................................................ 400 492 437 Other non-cash charges......................................... 168 65 208 Write-off of fixed assets...................................... 6 119 204 Gain on sale of businesses/Mailwatch service line.............. (5,017) - (426) Impairments of goodwill and intangibles........................ 500 - 78,784 Impairments of investments..................................... - - 1,515 Changes in operating assets and liabilities: Accounts receivable, net..................................... 1,396 508 7,278 Prepaid expenses and other current assets.................... (911) 260 (210) Other assets................................................. 232 460 (83) Accounts payable, accrued expenses and other current liabilities........................................ (4,895) (4,931) (18,346) --------- --------- --------- Net cash provided by operating activities...................... 6,278 7,658 2,160 --------- --------- --------- Cash flows from investing activities: Purchases of property and equipment, including capitalized software........................................... (2,970) (4,214) (3,498) Proceeds from sale of businesses/Mailwatch service line........ 3,500 - 426 Proceeds from sale of assets................................... 1,000 - - --------- --------- --------- Net cash provided by (used in) investing activities............ 1,530 (4,214) (3,072) --------- --------- --------- Cash flows from financing activities: Net proceeds from issuance of Class A common stock............. - 1,000 - Net proceeds from issuance of Class A common stock upon exercise of employee stock options........................... 32 70 - Payments under capital lease obligations....................... (472) (426) (585) Proceeds from notes payable.................................... 12,000 - - Principal payments of notes payable............................ (12,053) (5,793) (821) Interest payments on restructured notes and capitalized interest. (1,009) (843) (897) --------- --------- --------- Net cash used in financing activities.......................... (1,502) (5,992) (2,303) --------- --------- --------- Effect of foreign exchange rate changes on cash and cash equivalents........................................ (329) (27) (209) --------- --------- --------- Net increase (decrease) in cash and cash equivalents.......... 5,977 (2,575) (3,424) Cash used in discontinued operations........................... (300) (356) (300) Cash and cash equivalents at beginning of the year............. 6,623 9,554 13,278 --------- --------- --------- Cash and cash equivalents at the end of the year............... $12,300 $6,623 $9,554 ========= ========= ========= Supplemental disclosures of cash flow information: Cash paid for interest......................................... $497 $691 $3,138 Net cash paid for taxes........................................ $173 $48 $31 Purchases of property, plant and equipment through capital lease obligations........................................... $649 See accompanying notes to consolidated financial statements. 44 SUPPLEMENTAL DISCLOSURE OF NON-CASH INFORMATION: During the three years ended December 31, 2004, 2003, and 2002, the Company paid approximately $0.5 million, $0.7 million and $3.1 million, respectively, for interest. In addition, the Company issued 35,530, 284,304 and 888,810 shares of Class A common stock valued at approximately $48,000, $184,000 and $1.8 million, respectively, as payment of interest in lieu of cash for the years ended December 31, 2004, 2003 and 2002, respectively. During the year ended December 31, 2002, the Company issued 98,841 shares of its Class A common stock valued at approximately $524,000, in connection with certain settlement obligations. During the year ended December 31, 2002 the Company issued 127,550 shares of its Class A common stock valued at approximately $182,000, in connection with the settlement of vendor obligations. During the years ended December 31, 2004, 2003 and 2002, the Company issued 273,129, 531,545 and 314,642 shares, respectively, in connection with matching contributions to its 401K plan. These shares were valued at approximately $400,000, $492,000 and $437,000, respectively. NON-CASH INVESTING ACTIVITIES: No shares were issued in connection with non-cash investing activities during the years ended December 31, 2004, 2003 and 2002. NON-CASH FINANCING ACTIVITIES: During the year ended December 31, 2003, the company issued 23,881,705 shares of Class A common stock in connection with its cancellation of debt. This resulted in non-cash financing activities of $13.57 million (See Note 7). The Company entered into various capital leases for computer equipment. These capital lease obligations resulted in non - cash financing activities of $649,000 during 2004. 45 EASYLINK SERVICES CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2004 AND 2003 (1) SUMMARY OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES (A) SUMMARY OF OPERATIONS The Company offers a broad range of information exchange services to businesses and service providers, including Transaction Management Services consisting of integrated desktop messaging services and document capture and management services such as fax to database, fax to data and data conversion services; Transaction Delivery Services consisting of electronic data interchange or "EDI," and production messaging services utilizing email, fax and telex; and through July 31, 2004, services that protect corporate e-mail systems such as virus protection, spam control and content filtering services (the MailWatch service line). The Company operates in a single industry segment, business communication services. Although the Company provides various major service offerings, many customers employ multiple services using the same access and network facilities. Similarly, network operations and customer support services are provided across various services. Accordingly, allocation of expenses and reporting of operating results by individual services would be impractical and arbitrary. Services are provided in the United States and certain other regions in the world (predominantly in the United Kingdom). (B) CONSOLIDATED RESULTS OF OPERATIONS AND MANAGEMENT'S PLAN The accompanying consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. The Company has a working capital deficiency and an accumulated deficit that raises substantial doubt about its ability to continue as a going concern. The Company may need additional financing to meet cash requirements for its operations. If the Company is unable to generate sufficient cash flow or raise additional financing, the Company may be unable to continue as a going concern. The accompanying consolidated financial statements do not include any adjustment relating to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that might be necessary should the Company be unable to continue as a going concern. Management believes the Company's ability to continue as a going concern is dependent upon its ability to generate sufficient cash flow to meet its obligations on a timely basis, to obtain additional financing or refinancing as may be required, and to maintain profitable operations. Throughout 2002, 2003 and 2004, management improved the Company's operations through cost reductions resulting in net cash from operations of $2.2 million, $7.7 million and $6.3 million, respectively, for those years. During those years, the Company reduced its working capital deficit to $19.6 million at year end 2002, $11.8 million at year end 2003 and $378,000 at year end 2004. During 2003, the Company reduced its debt by $63.0 million. In December, 2004, the Company refinanced its remaining secured debt through a new credit facility with Wells Fargo Foothill, Inc. Management is continuing the process of further reducing telecommunications and network-related operating costs while increasing its sales and marketing efforts. There can be no assurance that the Company will be successful in these efforts. (C) PRINCIPLES OF CONSOLIDATION AND BASIS OF PRESENTATION The consolidated financial statements include the accounts of the Company and its wholly-owned or majority-owned subsidiaries from the dates of acquisition. All other investments that the Company does not have the ability to control or exercise significant influence over are accounted for under the cost method. The interest of shareholders other than those of EasyLink is recorded as minority interest in the accompanying consolidated statements of operations and consolidated balance sheets. When losses applicable to minority interest holders in a subsidiary exceed the minority interest in the equity capital of the subsidiary, these losses are included in the Company's results, as the minority interest holder has no obligation to provide further financing to the subsidiary. All significant intercompany accounts and transactions have been eliminated in consolidation. WORLD.com, a wholly owned subsidiary, and its majority-owned subsidiaries have been reflected as discontinued operations in the accompanying financial statements. In September 2003, a previously vacated judgment in the amount of $931,000 was reinstated against the Company in connection with a suit against a broker engaged by the Company to sell the portal operations of its discontinued India.com business and the broker's counterclaim thereof. The judgment and related costs, net of reserves, are reflected in the loss from discontinued operations in the consolidated statement of operations for the year ended December 31, 2003. Effective January 23, 2002, the Company authorized and implemented a 10-for-1 reverse stock split of all issued and outstanding stock. Accordingly, all issued and outstanding share and per share amounts in the accompanying consolidated financial statements have been retroactively restated to reflect the reverse stock split. (D) USE OF ESTIMATES The preparation of financial statements in accordance with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities and the reported amounts of revenues and expenses. These estimates and assumptions relate to the estimates of collectibility of accounts receivable, the realization of goodwill and other intangibles, accruals and other factors. Actual results could differ from those estimates. (E) CASH AND CASH EQUIVALENTS The Company considers all highly liquid securities, with original maturities of three months or less when acquired, to be cash equivalents. 46 (F) MARKETABLE SECURITIES All of the Company's marketable securities are classified as available-for-sale securities with unrealized gains and losses excluded from earnings and reflected as a separate component of stockholders' equity. (G) PROPERTY AND EQUIPMENT Property and equipment are stated at cost. Depreciation is calculated using the straight-line method over the estimated useful lives of the related assets, generally ranging from three to five years. Property and equipment under capital leases are stated at the present value of minimum lease payments and are amortized using the straight-line method over the shorter of the lease term or the estimated useful lives of the assets. Leasehold improvements are amortized using the straight-line method over the estimated useful lives of the assets or the term of the lease, whichever is shorter. (H) INVESTMENTS Investments in which the Company owns less than 20% of a company's stock and does not have the ability to exercise significant influence are accounted for on the cost basis. Such investments are stated at the lower of cost or market value and are included in other non current assets on the balance sheet. The equity method of accounting is used for companies and other investments in which the Company has significant influence; generally this represents common stock ownership of at least 20% but not more than 50%. Under the equity method, the Company's proportionate share of each investee's operating losses is included in loss on equity investments within the Statement of Operations. These investments are included in other non current assets on the balance sheet. The Company assesses the need to record impairment losses on investments and records such losses when the impairment is determined to be other-than-temporary. These losses are included in other income (expense) in the Statement of Operations. In 2002, the Company wrote down the value of two of its investments by $1.5 million due to the other than temporary decline in their values. As a result, all of the Company's investments have been written down to minimal amounts. (I) ACCOUNTING FOR IMPAIRMENT OF LONG-LIVED AND INTANGIBLE ASSETS Effective January 1, 2002, the Company adopted SFAS No. 142, "Goodwill and Other Intangible Assets" and SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Asset". SFAS 142 eliminates the amortization of goodwill and indefinite-lived intangible assets, addresses the amortization of intangible assets with finite lives and addresses impairment testing and recognition for goodwill and indefinite-lived intangible assets. SFAS No. 144 establishes a single model for the impairment of long-lived assets including intangible assets with finite lives. The Company assesses goodwill and indefinite-lived intangible assets for impairment annually unless events occur that require more frequent reviews. Long-lived assets, including amortizable intangibles, are tested for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Discounted cash flow analyses are used to assess indefinite-lived intangible asset impairment while undiscounted cash flow analyses are used to assess finite lived intangibles and other long-lived asset impairment. If an assessment indicates impairment, the impaired asset is written down to its fair market value based on the best information available. Estimated fair market value is generally measured with discounted estimated future cash flows. Considerable management judgment is necessary to estimate undiscounted and discounted future cash flows. Assumptions used for these cash flows are consistent with internal forecasts. On an ongoing basis, management reviews the value and period of amortization or depreciation of long-lived assets, including other intangible assets. During this review, the significant assumptions used in determining the original cost of long-lived assets are reevaluated. Although the assumptions may vary from transaction to transaction, they generally include revenue growth, operating results, cash flows and other indicators of value. Management then determines whether there has been an impairment of the value of long-lived assets based upon events or circumstances, which have occurred since acquisition. The impairment policy is consistently applied in evaluating impairment for each of the Company's wholly owned subsidiaries and investments. (J) INTANGIBLE ASSETS Intangible assets include goodwill, trademark, customer lists, technology and other intangibles. Goodwill represents the excess of the purchase price of acquired businesses over the estimated fair value of the tangible and identifiable intangible net assets acquired. Trademark is deemed to have indefinite life and therefore is not amortized. Customer lists are being amortized on a straight-line basis over ten years. Technology is being amortized on a straight-line basis over its estimated useful lives from three to five years. See note 5. 47 (K) INCOME TAXES Income taxes are accounted for under the asset and liability method. Under this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in results of operations in the period that the tax change occurs. Valuation allowances are established, when necessary, to reduce deferred tax assets to the amount expected to be realized. (L) REVENUE RECOGNITION The Company's business communication services include Transaction Management Services consisting of integrated desktop messaging services and document capture and management services such as fax to database, fax to data and data conversion; Transaction Delivery Services consisting of electronic data interchange or "EDI" and production messaging services utilizing email, fax and telex; and, through July 31, 2004, services that help protect corporate e-mail systems such as virus protection, spam control and content filtering services (the MailWatch service line). The Company derives revenues from monthly fees and usage-based charges for all its services and from license fees for integrated desktop messaging. Revenues for services are recognized as performed. License revenue is recognized over the average estimated customer life of 3 years. Other revenues consist of revenues from the licensing of domain names wherein revenue is recognized ratably over the license period. Such revenues amounted to $392,000, $475,000 and $480,000 in 2004, 2003 and 2002, respectively. In December, 2004, the Company sold its domain name assets to the former Chairman of the Board of Directors. See Note 3. (M) PRODUCT DEVELOPMENT COSTS Product development costs consist primarily of personnel and consultants' time and expense to research, conceptualize, and test product launches and enhancements to each of the Company's services. Such costs are expensed as incurred. (N) SALES AND MARKETING COSTS The primary component of sales and marketing expenses are salaries and commissions for sales, marketing, and business development personnel. The Company expenses the cost of advertising and promoting its services as incurred. (O) FINANCIAL INSTRUMENTS AND CONCENTRATION OF CREDIT RISK Financial instruments that potentially subject the Company to significant concentrations of credit risk consist of cash, cash equivalents, accounts receivable, notes payable and convertible notes payable. At December 31, 2004 and 2003, the fair value of cash, cash equivalents, marketable securities and accounts receivable approximated their financial statement carrying amount because of the short-term maturity of these instruments. The recorded values of loans payable, notes payable and convertible notes payable approximate their fair values, as interest approximates market rates with the exception of the Convertible Subordinated Notes payable with a carrying value of $1.4 million. However, as these notes are payable in February 2005, management estimates that their fair value approximates their carrying value. Credit is extended to customers based on the evaluation of their financial condition and collateral is not required. The Company performs ongoing credit assessments of its customers and maintains an allowance for doubtful accounts. No single customer exceeded 10% of either total revenues or accounts receivable in 2004, 2003 or 2002. Revenues from the Company's five largest customers accounted for an aggregate of 10%, 7% and 6% of the Company's total revenues in 2004, 2003 and 2002, respectively. (P) STOCK-BASED COMPENSATION PLANS In 2004, 2003 and 2002, the Company had stock option plans, which are described more fully in Note 13. As allowed by SFAS No. 123, Accounting for Stock-Based Compensation, as amended by SFAS No. 148, the Company has retained the compensation measurement principles of Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees, and its related interpretations for stock options. The Company adopted the disclosure provisions of SFAS No. 148 as of December 31, 2002 and continues to apply the measurement provisions of APB 25. Under APB Opinion No. 25, compensation expense is recognized based upon the difference, if any, at the measurement date between the market value of the stock and the option exercise price. The measurement date is the date at which both the number of options and the exercise price for each option are known. The following table illustrates the effect on net income (loss) and net income (loss) per share if the fair value recognition provisions of SFAS No. 123 had been applied to stock-based employee compensation. 48 ($ IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) FOR THE YEAR ENDED DECEMBER 31, ------------------------------ 2004 2003 2002 ---------- ---------- ---------- Net income (loss): Income (loss) from continuing operations, as reported......... $ 7,602 $ 51,886 $ (85,845) Deduct total stock based employee compensation expense determined under the fair value method for all awards, net of tax.................................................... (2,769) (8,394) (9,343) ---------- ---------- ---------- Pro forma income (loss) from continuing operations............ $ 4,833 43,492 (95,188) Loss from discontinued operations............................. $ - $ (938) - ---------- ---------- ---------- Proforma net income (loss).................................... $ 4,833 $ 42,554 $ (95,188) ========== ========== ========== Basic net income (loss) per share: Income (loss) from continuing operations as reported.......... $ 0.17 $ 1.47 $ (5.13) Deduct total stock based employee compensation expense determined under the fair value method for all awards, net of tax........................................ $ (0.06) $ (0.24) $ (0.56) ---------- ---------- ---------- Pro forma income (loss) from continuing operations. $ 0.11 $ 1.23 $ (5.69) Loss from discontinued operations $ - $ (0.03) - ---------- ---------- ---------- Proforma basic net income (loss).............................. $ 0.11 $ 1.20 $ (5.69) ========== ========== ========== Diluted net income (loss) per share: Income (loss) from continuing operations as reported.......... $ 0.17 $ 1.46 $ (5.13) Deduct total stock based employee compensation Expense determined under the fair value method for all awards, net of tax........................................ $ (0.06) $ (0.24) $ (0.56) ---------- ---------- ---------- Pro forma income (loss) from continuing operations............ $ 0.11 $ 1.22 $ (5.69) Loss from discontinued operations............................. $ - $ (0.03) - ---------- ---------- ---------- Proforma diluted net income (loss)............................ $ 0.11 $ 1.19 $ (5.69) ========== ========== ========== The resulting effect on the pro forma net income (loss) disclosed for the years ended December 31, 2004, 2003 and 2002 is not likely to be representative of the effects of the net loss on a pro forma basis in future years, because the pro forma results include the impact of three, four and five years, respectively, of grants and related vesting of option prices ranging from $0.53 per share to $294.80 per share. Subsequent years will include additional grants at the then current stock prices and vesting. For purposes of pro-forma disclosure, the estimated fair value of the options is amortized to expense over the options' vesting period. The fair value of each option grant is estimated on the date of grant using the Black Scholes method option-pricing model with the following assumptions used for grants made in 2004: dividend yield of zero (0%) percent, average risk-free rate interest rate of 3.4%, expected life of 5 years and volatility of 119%, 2003: dividend yield of zero (0%) percent, average risk-free rate interest rate of 3.0%, expected life of 5 years and volatility of 123%, 2002: dividend yield of zero (0%) percent, average risk-free interest rate of 4.1%, expected life of 5 years and volatility of 120%. (Q) BASIC AND DILUTED NET INCOME (LOSS) PER SHARE Net income (loss) per share is presented in accordance with the provisions of SFAS No. 128, "Earnings Per Share", and the Securities and Exchange Commission Staff Accounting Bulletin No. 98. Under SFAS No. 128, basic Earnings per Share ("EPS") excludes dilution for common stock equivalents and is computed by dividing income or loss available to common shareholders by the weighted average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock and resulted in the issuance of common stock. 49 Diluted net income per common share for the years ended December 31, 2004 and 2003 include the effect of employee options to purchase 886,765 and 251,527 shares of common stock, respectively. Diluted net loss per share is equal to basic loss per share for the year ended December 31, 2002, since all common stock equivalents are anti-dilutive for this period. Diluted net income (loss) per common share for the years ended December 31, 2004, 2003 and 2002, does not include the effects of employee options to purchase 1,524,086, 1,429,516 and 2,773,446 shares of common stock, respectively, and 798,523, 798,523 and 1,843,982 common stock warrants, respectively, as their inclusion would be antidilutive. Similarly, the computation of diluted net loss per share for 2002 excludes the effect of shares issuable upon the conversion of any outstanding Convertible Notes at December 31, 2002. (R) COMPUTER SOFTWARE Capitalized computer software is recorded in accordance with the American Institute of Certified Public Accountants Statement of Position ("SOP") 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use" and is depreciated using the straight-line method over the estimated useful life of the software, generally 3 years. SOP 98-1 provides guidance for determining whether computer software is internal-use software and guidance on accounting for the proceeds of computer software originally developed or obtained for internal use and then subsequently sold to the public. It also provides guidance on capitalization of the costs incurred for computer software developed or obtained for internal use. (S) RECENT ACCOUNTING PRONOUNCEMENTS In July 2002, Statement of Financial Accounting Standards No. 146, "Accounting for Costs Associated with Exit or Disposal Activities" ("Statement 146") was issued. This Statement addresses financial accounting and reporting for costs associated with exit or disposal activities and nullifies Emerging Issues Task Force Issue ("EITF") 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)." The principal difference between Statement 146 and EITF 94-3 relates to the timing of liability recognition. Under Statement 146, a liability for a cost associated with an exit or disposal activity is recognized when the liability is incurred. Under EITF 94-3, a liability for an exit cost was recognized at the date of an entity's commitment to an exit plan. The provisions of Statement 146 are effective for exit or disposal activities that are initiated after December 31, 2002. The adoption of this statement did not have a material impact on the Company's financial position or results of operations. In November 2002, the FASB issued FIN 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others." FIN 45 elaborates on the existing disclosure requirements for most guarantees, including residual value guarantees issued in conjunction with operating lease agreements. It also clarifies that at the time a company issues a guarantee the company must recognize an initial liability for the fair value of the obligation it assumes under that guarantee and must disclose that information in its interim and annual financial statements. The initial recognition and measurement provisions apply on a prospective basis to guarantees issued or modified after December 31, 2002. The disclosure requirements are effective for financial statements or interim or annual periods ending after December 15, 2002. The adoption of FIN 45 did not materially impact the Company's financial position and results of operations. In January 2003, the FASB issued Interpretation No. 46 ("FIN 46"), "Consolidation of Variable Interest Entities", and amended the interpretation with FIN 46(R) in December 2003. This interpretation and its amendment set forth a requirement for an investor with a majority of the variable interests in a variable interest entity ("VIE") to consolidate the entity and also requires majority and significant variable interest investors to provide certain disclosures. A VIE is an entity in which the equity investors do not have a controlling interest, or the equity investment at risk is insufficient to finance the entity's activities without receiving additional subordinated financial support from the other parties. The provisions of FIN 46 were effective immediately for all arrangements entered into with new VIEs created after January 31, 2003. The Company has not entered into any arrangements with VIEs after January 31, 2003. For arrangements entered into with VIEs created prior to January 31, 2003, the provisions of FIN 46 have been delayed to the first interim or annual period beginning after December 15, 2003. The Company has evaluated the impact of adoption of FIN 46(R) for its arrangements created before January 31, 2003. The adoption of this standard did not materially impact the Company's financial statements. 50 In April 2003, the FASB issued SFAS No. 149, "Amendment of SFAS No. 133 on Derivative Instruments and Hedging Activities." SFAS No. 149 amends and clarifies accounting for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities under SFAS No. 133. In particular, this Statement clarifies under what circumstances a contract with an initial net investment meets the characteristic of a derivative. It also clarifies when a derivative contains a financing component that warrants special reporting in the statement of cash flows. SFAS No. 149 is generally effective for contracts entered into or modified after June 30, 2003 and did not materially impact the Company's financial statements. In May 2003, the FASB issued Statement of Financial Accounting Standard No. 150 ("SFAS 150"), "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity", which establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. The provisions of SFAS 150 are effective immediately for all instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. The adoption of this standard did not have an effect on the Company's financial statements. In December 2004, the Financial Accounting Standards Board ("FASB") issued SFAS 123 (revised 2004), "Share-Based Payment" (SFAS 123(R)) which replaces SFAS 123, "Accounting for Stock-Based Compensation," and supersedes APB Opinion No. 25, "Accounting for Stock Issued to Employees. Among other items, SFAS 123(R) eliminates the use of APB 25 and the intrinsic method of accounting, and requires all share-based payments, including grants of employee stock options, to be recognized in the financial statements based on their fair values. SFAS 123(R) is effective for public companies beginning with the first interim period that begins after June 15, 2005. The Company will adopt SFAS 123(R) in 2005 and in accordance with its provisions will recognize compensation expense for all share-based payments and employee stock options based on the grant-date fair value of those awards. The Company is currently evaluating the impact of the statement on its financial statements. See Note 1 (p) for the proforma effect of SFAS 123. In December 2004, the FASB issued FASB Staff Position, 109-1 ("FSP FAS 109-1"), "Application of FASB Statement No. 109, "Accounting for Income Taxes," to the Tax Deduction on Qualified Production Activities Provided by the American Jobs Creation Act of 2004". In FSP FAS 109-1, the FASB concluded that the tax relief (special tax deduction for domestic manufacturing) from this legislation should be accounted for as a "special deduction" instead of a tax rate reduction. The guidance in FSP FAS 109-1 was effective December 21, 2004 and had no impact on the Company's results of operations or its financial position. In December 2004, the FASB issued FSP FAS 109-2, "Accounting and Disclosure Guidance for the Foreign Earnings Repatriation Provision within the American Jobs Creation Act of 2004". The American Jobs Creation Act of 2004 introduces a special one-time dividends received deduction on the repatriation of certain foreign earnings to a U.S. taxpayer (repatriation provision), provided certain criteria are met. FSP FAS 109-2 gives a company additional time to evaluate the effects of the legislation on any plan for reinvestment or repatriation of foreign earnings for purposes of applying SFAS No. 109, Accounting for Income Taxes. The deduction is subject to a number of limitations, and uncertainty remains as to how to interpret numerous provisions in the Act. As such, the Company is not in a position to decide on whether, and to what extent, it might repatriate foreign earnings that have not yet been remitted to the U.S. based on its analysis to date. The Company expects to be in a position to finalize its assessment by December 31, 2005. In September 2004, the Emerging Issues Task Force ("EITF") of the FASB reached a consensus on EITF Issue No. 04-08, "The Effect of Contingently Convertible Debt on Diluted Earnings Per Share," which requires the shares issuable under contingently convertible debt, such as the Company's convertible subordinated debentures, to be included in diluted earnings per share computations, regardless of whether the contingency had been met, if the effect would be dilutive to the earnings per share calculation. The provisions are effective for reporting periods ending after December 15, 2004. If the impact is dilutive, all prior period earnings per share amounts presented are required to be restated to conform to the provisions of the EITF. The Company adopted this rule during the fourth quarter of 2004 and there was no effect on diluted income (loss) per share for all periods presented since the effect was anti-dilutive to the earnings per share calculation. (T) FOREIGN CURRENCY The functional currencies of the Company's foreign subsidiaries are their respective local currencies. The financial statements are maintained in local currencies and are translated to United States dollars using period-end rates of exchange for assets and liabilities and average rates during the period for revenues, cost of revenues and expenses. Translation gains and losses are included in accumulated other comprehensive loss as a separate component of stockholders' equity (deficit). Gains and losses from foreign currency transactions are included in consolidated statements of operations and were not significant. 51 (2) SALE OF BUSINESSES/MAILWATCH SERVICE LINE On September 20, 2002, the Company sold its customer contracts related to its email hosting service ("NIMS") line to Call Sciences, Inc. Call Sciences paid $300,000 in cash upon closing. In connection with the sale, the parties entered into a transition services agreement whereby the Company would receive payments for services rendered during the 2 month period following the close. As a result of the sale, the Company transferred the customer contracts and recorded a gain on the sale of NIMS of $300,000. In October 2002, the Company sold for $126,000 a software and consulting business in England that was previously acquired in an earlier acquisition. The full purchase price was recorded as a gain as the net book value of assets transferred was zero. On July 31, 2004, the Company sold its MailWatch service line to Infocrossing, Inc. for total consideration of approximately $5.0 million, including $3.5 million in cash and 123,193 shares of Infocrossing's common stock valued at approximately $1.5 million. The sale resulted in a gain of $4.1 million before income taxes. The Infocrossing stock is reported at market value in the December 31, 2004 balance sheet and the unrealized gain related thereto of $521,000 is included in the accumulated other comprehensive gain(loss) account in stockholders' equity. (3) SALE OF INTERNET DOMAIN NAMES In December 2004, the Company sold its internet domain name portfolio and related assets to its former Chairman of the Board of Directors for $1 million and recognized a gain of $891,000 on the transaction. In addition to the initial purchase price, the Company will receive 15% of all revenues related to the purchased domain names during the second and third years following the sale and 10% of all such revenues in the fourth and fifth years. The Company also has the option to purchase back substantially all the domain names for $4.5 million at any time during the fourth and fifth years. The former Chairman resigned as an employee of the Company and member of the Board of Directors on the same day as the domain name sale was completed. Furthermore, he agreed to the conversion of all his one million shares of 10 for 1 super-voting Class B common stock into 1 for 1 standard voting Class A common stock. As a result, there are no Class B shares outstanding as of December 31, 2004. (4) PROPERTY AND EQUIPMENT Property and equipment, net of accumulated depreciation and amortization, are stated at cost or allocated fair value and are summarized as follows, in thousands: DECEMBER 31, 2004 2003 -------- -------- Computer equipment and software...................................................... $ 39,878 $ 40,878 Furniture and fixtures............................................................... 1,589 1,589 Web development...................................................................... 181 181 Leasehold improvements............................................................... 2,282 2,187 -------- -------- Subtotal............................................................................. 43,930 44,835 Less accumulated depreciation and amortization....................................... 35,805 34,194 -------- -------- Property and equipment, net.......................................................... $ 8,125 $ 10,641 ======== ======== Depreciation and amortization expense of property and equipment totaled $5.0 million, $8.3 million and $10.4 million for the years ended December 31, 2004, 2003 and 2002, respectively. (5) GOODWILL AND INTANGIBLE ASSETS In June 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets" ("SFAS 142"). SFAS 142 requires that goodwill and intangible assets with indefinite useful lives no longer be amortized, but instead tested for impairment at least annually in accordance with the provisions of Statement 142. Statement 142 also requires that intangible assets with finite useful lives be amortized over their respective estimated useful lives to their estimated residual values, and reviewed for impairment in accordance with SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of" ("SFAS 144"). The Company adopted the provisions of SFAS 142 effective January 1, 2002. 52 As of January 1, 2002, the date of adoption, the Company had unamortized goodwill in the amount of $68.8 million, which was subject to the transition provisions of SFAS 142. During the quarter ended June 30, 2002, the Company completed its assessment with the assistance of an independent appraiser and determined that there was no impairment as of January 1, 2002. During the quarter ended December 31, 2002, the Company completed a new assessment with the assistance of an independent appraiser and determined that there was an impairment. Accordingly, a fair value analysis was performed on the Company's goodwill, intangible assets and other long lived assets which resulted in an aggregate impairment charge of $78.8 million, allocated as follows: $7.5 million-trademarks, $7.6 million-customer base, $1.1 million-technology, and $62.6 million-goodwill. During 2002, economic and market conditions led to forecasts with lower growth rates and a significantly lower market value of the Company. The methodology used to determine the business enterprise of the Company was the income approach, a discounted cash flow valuation method. The discount rate was determined by using a weighted average cost of capital analysis which was developed using a capital structure which reflects the representative historical mix of debt and equity of a group of guideline companies in this business. Assumptions for normal working capital levels and taxes were also incorporated in the analysis. The value of the tradename and developed technology was based on the relief-from-royalty method. This determines the value by quantifying the cost savings a company enjoys by owning, as opposed to licensing, the intangible asset. The value of the Company's customer base was also determined through an income approach. During the quarter ended December 31, 2003, the Company completed its 2003 assessment of its goodwill and indefinite-lived intangible assets with the assistance of an independent appraiser and determined that there was no further impairment of these assets. The evaluation employed the same methodology as that used in the 2002 evaluation. During the quarter ended December 31, 2004, the Company completed its 2004 assessment of its goodwill and indefinite-lived intangible assets with the assistance of an independent appraiser and determined that there was an impairment of its trademark of $500,000. The evaluation employed the same methodology as that used in the prior years' evaluations. Included in the Company's balance sheet as of December 31, 2004 and 2003 are the following (in thousands): AS OF DECEMBER 31, 2004 -------------------------------------- ACCUMULATED GROSS COST AMORTIZATION NET ---------- -------------- -------- Intangibles with indefinite lives: Goodwill.............................................................. $ 152,659 $(146,393) $ 6,266 ========== ============== ======== Trademarks............................................................ $ 15,500 $ (10,400) $ 5,100 ========== ============== ======== Intangibles with finite lives: Technology............................................................ $ 16,550 $ (14,339) $ 2.211 Customer lists........................................................ 11,000 (9,943) 1,057 Software development and licenses..................................... 4,564 (4,086) 478 ---------- -------------- -------- $ 32,114 $ (28,368) $ 3,746 ========== ============== ======== AS OF DECEMBER 31, 2003 -------------------------------------- ACCUMULATED GROSS COST AMORTIZATION NET ---------- -------------- -------- Intangibles with indefinite lives: Goodwill.............................................................. $ 152,659 $(146,393) $ 6,266 ========== ============== ======== Trademarks............................................................ 16,000 $ (10,400) $ 5,600 ========== ============== ======== Intangibles with finite lives: Technology............................................................ $ 16,550 $ (12,445) $ 4,105 Customer lists........................................................ 11,000 (9,771) 1,229 Software development and licenses..................................... 4,580 (3,885) 695 ---------- -------------- -------- 32,130 $ (26,101) $ 6,029 ========== ============== ======== 53 The Company's estimated amortization expense is $2.3 million, $0.6 million, $0.2 million, $0.2 million, and $0.2 million in 2005, 2006, 2007, 2008 and 2009, respectively. In accordance with Statement 142, the Company reassessed the useful lives of all other intangible assets. There were no changes to such lives and there are no expected residual values associated with these intangible assets. Customer lists are being amortized on a straight-line basis over ten years. Technology and software development and licenses are being amortized on a straight-line basis over their estimated useful lives from two to five years. (6) ACCRUED EXPENSES Accrued expenses consist of the following, in thousands: DECEMBER 31, 2004 2003 -------- -------- Carrier charges...................................................................... $ 3,820 $ 5,507 Payroll and related costs............................................................ 2,960 2,532 Sales/Use/VAT taxes payable.......................................................... 1,506 1,792 Federal and state income taxes payable............................................... 1,780 -- Professional services, consulting fees and sales agents' commissions............................................................ 1,581 1,295 Interest............................................................................. 90 233 Software and hardware maintenance.................................................... 181 168 Other................................................................................ 1,973 2,809 -------- -------- Total................................................................................ $ 13,891 $ 14,336 ======== ======== (7) LOANS AND NOTES PAYABLE Loans and notes payable include the following, in thousands: December 31, ----------------------------------------------- 2004 2003 -------------- ------------------------- Capitalized Principal Interest Principal --------- ----------- --------- Term loan payable.................................... $ 12,000 --- --- 7% Convertible Subordinated Notes, due February 1, 2005.............................. 1,425 --- $ 1,425 12% restructure note: as amended and restated effective September 2003................. --- 1,884 10,504 12% restructured notes payable quarterly beginning June 2003.............................. --- 109 1,025 Restructure balloon payment due November, 2004....... --- --- 396 12% restructure note payable to shareholder........................................ --- 3 118 --------- ----------- --------- Total loans and notes payable........................ 13,425 1,996 13,468 Current portion...................................... 3,825 1,040 2,957 --------- ----------- --------- Long term portion.................................... $ 9,600 $ 956 $ 10,511 ========= =========== ========= 54 TERM LOAN PAYABLE On December 16, 2004 the Company entered into a $15 million credit facility with Wells Fargo Foothill, Inc. (a subsidiary of Wells Fargo Bank) that includes a $12 million Term Loan payable monthly over 60 months and the availability of working capital advances of $3 million initially, increasing to $7.5 million upon the completion of certain items by the Company subject to limitations including the maximum outstanding under the facility of $15 million. The credit facility is secured by a security interest in substantially all of the Company's assets. $9.5 million of the proceeds from the Term Loan were used by the Company to repay all outstanding restructure notes. The balance of the proceeds will be used to repay the outstanding balance of the 7% Convertible Subordinated Notes, due February 1, 2005 and to fund other cash requirements of the Company's operations. As a result of the repayment of the restructure notes, $984,000 of previously capitalized interest was reversed and recognized as a gain on debt restructurings and settlements. The capitalized interest had been recorded in 2001 at the time of previous debt restructuring in accordance with SFAS No. 15, "Accounting by Debtors and Creditors for Troubled Debt Restructurings. Interest on the Term Loan is payable monthly at the rate of 3.75% over the Wells Fargo Bank prime rate and an annual fee of 1% of the balance outstanding is payable on each anniversary of the loan. The Term Loan includes certain mandatory prepayments as follows: (1) beginning with the year ended December 31, 2005, a mandatory prepayment is required for any year in which the Company has "excess cash flow", as defined in the agreement, equal to the lesser of $400,000 or 25% of the excess cash flow for that year; (2) upon the sale or disposition of certain assets excluding up to $3,000,000 in proceeds from the sale of domain names and up to $2,000,000 from the sale of Infocrossing, Inc. stock obtained in the MailWatch service line sale; (3) upon the receipt of certain extraordinary funds as defined in the agreement in excess of $1,000,000; and (4) at any time that total borrowings under the credit facility exceeds one of the following: $15,000,000, 2 times trailing twelve months EBITDA, 50% of the Company's enterprise valuation or the amount of accounts receivable collections for domestic revenues for the preceding 90 days. Interest on outstanding Advances is payable monthly at the rate of 0.75% over the Wells Fargo Bank prime rate. A fee of 0.25% per annum is payable monthly on the amount of available but unused advances and a servicing fee of $2,500 per month is also payable. Advances are specifically limited to 85% of Eligible Accounts Receivable which represent all revenues from US customers excluding certain balances based on the periods such balances are outstanding. The credit facility includes certain affirmative and restrictive covenants, including a restriction on the incurrence of indebtedness, a restriction on the payment of dividends, limitations on capital expenditures and maintenance on quarterly levels of EBITDA. The Company was not in compliance with the $3 million limitation on capital expenditures for 2004; however, Wells Fargo waived the covenant. Additionally, on March 31, 2005, the Company entered into an amendment to the credit agreement whereby it can exclude severance charges related to the George Abi Zeid settlement of up to $2.475 million from the calculation of EBITDA for covenant compliance purposes. 7% CONVERTIBLE SUBORDINATED NOTES The 7% Convertible Subordinated Notes outstanding as of December 31, 2004 and 2003 represent the balance outstanding from $100 million in notes issued on January 26, 2000. The Notes are convertible by holders into shares of EasyLink Class A common stock at a conversion price of $189.50 per share. Through a series of exchange, settlement and restructuring transactions completed in 2001 through 2003, the outstanding notes were reduced to the current amount which was paid on the maturity date of February 1, 2005. RESTRUCTURE NOTES On November 27, 2001, the Company completed the restructuring of approximately $63 million of debt and lease obligations and a related financing in the amount of approximately $10 million. Under the terms of the debt restructuring, the Company exchanged an aggregate of approximately $63 million of debt and equipment lease obligations for an aggregate of approximately $20 million of restructure notes and obligations due in installments commencing June 2003 through June 2006, 1.97 million shares of Class A Common Stock and warrants to purchase 1.8 million shares of Class A Common Stock. In addition, the Company purchased certain leased equipment for an aggregate purchase price of $3.5 million. The restructure notes accrued interest at a rate of 12% per annum and were scheduled to mature five years from the date of the debt restructuring. The Company was able to elect to defer payment of accrued interest on a portion of the restructure notes until various dates commencing June 2003 and to elect to pay accrued interest on other restructure notes in shares of Class A common stock having a market value at the time of payment equal to 120% of the interest payment due. The Company was not required to make scheduled principal payments on any of the notes until June 2003. 55 One restructure note, which was amended and restated effective September 2003, was originally issued for $10 million to AT&T Corp. in connection with the 2001 debt restructuring. The debt was originally $35 million from the acquisition of STI, including the EasyLink Services business as purchased from AT&T by STI shortly before the Company's acquisition. In 2003, AT&T entered into an agreement to sell the $10 million note and 1.4 million shares of EasyLink Class A common stock, received by AT&T as part of the debt restructuring, to PTEK Holdings, Inc. ("PTEK"), one of the Company's principal competitors. Following the announcement of the agreement, the Company commenced legal proceedings to enjoin AT&T from selling the note and to assert claims for damages against AT&T and PTEK. In October 2003 the legal dispute was settled. Under the settlement, the Company agreed to consent to the transfer of the note and shares from AT&T to PTEK in exchange for a revised amortization schedule on the note and return of a warrant to the Company for cancellation. The warrant, also issued in connection with the 2001 debt restructuring, was for the purchase of 1 million shares of the Company's Class A common stock at a purchase price of $6.10 per share. The amended and restated note, amounting to $11.0 million which included the balance of principal and interest outstanding as of September 1, 2003, was repayable in quarterly installments of principal and interest of $800,000 with a final payment of $5.8 million on the June 1, 2006 maturity date. During 2002, the Company entered into two separate transactions repurchasing $5.0 million in 10% Senior Convertible Notes and a 12% Senior Restructure Note and a restructure balloon liability in the amount of $0.5 million for a total of $0.6 million in cash and 5,415 shares in Class A common stock, valued at approximately $6,000. The Company recorded a $6.6 million in gains on the transactions including the reversal of $1.7 million of capitalized interest related to the repurchased debt. During 2003, the Company entered into a series of transactions with debt holders to eliminate a total of $63.0 million of indebtedness in exchange for cash payments of $3.1 million and, the issuance of 23.9 million shares of Class A common stock valued at $13.6 million. The eliminated debt included $22.7 million of 7% Convertible Subordinated Notes, due February 2005, $31.1 million of 10% Senior Convertible Notes, due January 2006, a $2.7 million note payable to the former shareholder of STI (who was an officer and director of the Company), $6.0 million of Restructure notes and $0.5 million in other indebtedness. The Company also entered into agreements to repay an outstanding note in the principal amount of $115,000 and accrued interest obligations in the aggregate amount of $959,000 over the next three years, which accrued interest includes $284,000 due to the former shareholder of STI. In addition, after eliminating $6.5 million of previously capitalized interest, $2.7 million of accrued interest, and $0.3 million of debt issuance costs on the eliminated notes, these transactions resulted in a gain of $54.1 million or $1.52 per share on a basic and diluted basis. Also, the transactions relating to the previous $115,000 note and $959,000 of accrued interest have been accounted for in accordance with SFAS 15. (8) DISCONTINUED OPERATIONS In March 2000, the Company formed World.com, Inc. in order to develop the Company's portfolio of domain names into independent web properties and subsequently acquired or formed its subsidiaries Asia.com, Inc. and India.com, Inc., in which World.com was the majority owner. On November 2, 2000, the Company announced its intention to sell all assets not related to its core outsourced messaging business including Asia.com, Inc., India.com, Inc. and its portfolio of domain names. Accordingly, World.com has been reflected as a discontinued operation. Revenues, costs and expenses, assets, liabilities and cash flows of World.com have been excluded from the respective captions in the consolidated statement of operations, consolidated balance sheets and consolidated statements of cash flows and have been reported as "Loss from discontinued operations," "Net liabilities of discontinued operations," and "Net cash used in discontinued operations," for all periods presented. Summarized financial information (In thousands) for the discontinued operation is as follows: STATEMENTS OF OPERATIONS DATA YEAR ENDED DECEMBER 31, ----------------------------- 2004 2003 2002 -------- -------- -------- Revenues.............................................................. $ -- $ -- $ -- ======== ======== ======== Loss from discontinued operations..................................... $ -- $ 938 $ -- ======== ======== ======== 56 BALANCE SHEET DATA AS OF DECEMBER 31, ---------------------- 2004 2003 ---------- ---------- Current assets........................................................ $ 17 $ 17 Total assets.......................................................... 404 404 Current liabilities................................................... 740 1,040 Long-term liabilities and minority interest........................... 193 193 Net liabilities of discontinued operations............................ (528) (828) (9) LEASES In addition to capital leases, the Company leases facilities and certain equipment under agreements accounted for as operating leases. These leases generally require the Company to pay all executory costs such as maintenance and insurance. Rent expense for operating leases for the years ending December 31, 2004, 2003 and 2002 was approximately $3.6 million, $4.2 million, and $3.4 million, respectively. At December 31, 2004, the Company had $507,000 in gross amount of fixed assets and $67,000 of related accumulated amortization under capital leases. Future minimum lease payments under the remaining capital leases and non-cancellable operating leases (with initial or remaining lease terms in excess of one year) as of December 31, 2004 are as follows, in thousands: YEAR ENDING DECEMBER 31, CAPITAL OPERATING LEASES LEASES ------- --------- 2005................................................................................. $ 321 $2,917 2006................................................................................. 43 2,195 2007................................................................................. - 1,565 2008................................................................................. - 1,221 2009................................................................................. - 1,255 2010 and later....................................................................... - 3,764 ------- --------- Total minimum lease payments........................................... $ 364 $12,917 ======= ========= Less current portion of obligations under capital leases............................. 321 Obligations under capital leases, excluding current portion.......................... $ 43 ======= Of the total operating lease commitments as of December 31, 2004 noted above, $12.0 million is for occupied properties and $0.9 million is for abandoned properties, which are a component of the restructuring obligation. The balance for capital leases and related interest as of December 31, 2004 is for computer equipment and software. (10) RELATED PARTY TRANSACTIONS FEDERAL PARTNERS, L.P. FINANCINGS On January 8, 2001, the Company issued $5,000,000 principal amount of 10% Senior Convertible Notes due January 8, 2006 to Federal Partners. Stephen Duff, a director of the Company until November 2004, is Chief Investment Officer of The Clark Estates, Inc. and is Treasurer of the general partner of, and a limited partner of, Federal Partners, L.P. The note accrued interest at the rate of 10% per annum and was payable semi-annually one half in cash and, at the option of the Company, one half in shares of Class A common stock valued at the conversion price of $10.00 per share. The Company issued shares to Federal Partners in payment of interest on this note during 2003, 2002 and 2001. The Clark Estates, Inc. provides management and administrative services to Federal Partners. On March 20, 2001, the Company issued to Federal Partners 300,000 shares of our Class A common stock for a purchase price of $3,000,000, and committed to issue to Federal Partners an additional 100,000 shares of Class A common stock if the closing price of our Class A common stock on the principal securities exchange on which they are traded was not at or above $100 per share for 5 consecutive days. The additional shares were issued in 2002. As part of the financing completed on November 27, 2001 in connection with our debt restructuring, the Company issued to Federal Partners an aggregate of 250,369 shares of Class A common stock for a purchase price of $1,700,000, and we committed to issue to Federal Partners an additional 173,632 shares of Class A common stock if the average of the closing prices of our Class A common stock on Nasdaq was not at or above $16.00 per share for the 10 consecutive trading days through year end 2001. The additional shares were issued in 2002. Through his limited partnership interest in Federal Partners, Mr. Duff has an indirect interest in 10,789 of the shares of Class A common stock held by Federal Partners. 57 On May 1, 2003, Federal Partners exchanged the $5 million note for 2.5 million shares of Class A common stock value of approximately $1.4 million. In addition, on April 30, 2003, Federal Partners purchased 1,923,077 shares of Class A common stock of EasyLink at a purchase price of $.52 per share or $1 million in the aggregate. Federal Partners and accounts for which The Clark Estates, Inc. provides management and administrative services, were beneficial holders as of May 1, 2003 of 13.02% of the Company's common stock. ACQUISITION OF SWIFT TELECOMMUNICATIONS, INC. The Company acquired Swift Telecommunications, Inc. on February 23, 2001. George Abi Zeid was the sole shareholder of Swift Telecommunications, Inc ("STI"). In connection with the acquisition, Mr. Abi Zeid was elected to the Board of Directors of the Company and was appointed President - International Operations. EasyLink paid $835,294 in cash, issued 1,876,618 shares of Class A common stock valued at $30.8 million and issued a promissory note in the original principal amount of approximately $9.2 million to Mr. Abi Zeid in payment of the purchase price for the acquisition payable at the closing. Under the merger agreement, EasyLink also agreed to pay additional contingent consideration to Mr. Abi Zeid equal to the amount of the net proceeds, after satisfaction of certain liabilities of STI and its subsidiaries, from the sale or liquidation of the assets of one of STI's subsidiaries. During 2004, pursuant to such agreement the Company paid Mr. Abi Zeid $320,000 of net proceeds received by the Company. Pursuant to the debt restructuring completed on November 27, 2001, EasyLink issued $2,682,964 principal amount of restructure notes, 268,295 shares of Class A common stock valued at approximately $1.6 million and warrants to purchase 268,295 shares of Class A common stock in exchange for Mr. Abi Zeid's $9.2 million note. On May 1, 2003 in connection with the Company's 2003 debt restructuring, Mr. Abi Zeid exchanged the promissory note in the principal amount of $2,682,964 for 1,341,482 shares of Class A common stock valued at approximately $765,000 and agreed to defer interest payments due to him in the amount of $283,504, all of which has been paid. See Note 7 - Loans and Notes Payable. Subsequent to December 31, 2004 Mr. Abi Zeid resigned as an officer and director of the Company pursuant to a separation agreement. Under the agreement, the Company agreed to pay Mr. Abi Zeid $240,000 as a severance payment on the effective date of his resignation, February 4, 2005, and an aggregate amount of $1,960,000 in equal installments over three years in consideration of the non-compete and other covenants contained in the agreement. In connection with the agreement, the Company also agreed to pay $200,000 of severance payments to two other employees of the Company. SALE OF INTERNET DOMAIN NAMES In December 2004, the Company sold its portfolio of Internet domain names and related assets to Gerald Gorman, the Company's former Chairman and director. See Note 3. (11) CAPITAL STOCK REVERSE STOCK SPLIT Effective January 23, 2002, the Company authorized and implemented a 1 for 10 reverse stock split. Accordingly, all share and per share amounts in the accompanying consolidated financial statements have been retroactively restated to reflect the reverse stock split. AUTHORIZED SHARES As of December 31, 2004, the number of authorized shares consist of 500,000,000 shares of Class A common stock, 10,000,000 shares of Class B common stock and 60,000,000 undesignated shares of preferred stock, all with a par value of $0.01 per share. COMMON STOCK VOTING RIGHTS Each share of Class A common stock has one vote per share. Prior to the conversion into Class A common stock in December 2004, 1 million shares of Class B common stock, which were owned by the Chairman, had ten votes per share. 58 PRIVATE PLACEMENT OF COMMON STOCK On April 30, 2003, the Company completed a private placement of 1,923,077 shares of Class A common stock for an aggregate price of $1,000,000 to Federal Partners. SETTLEMENTS During 2002, the Company issued 226,391 shares of Class A common stock in connection with various settlements of certain obligations and for payment of services rendered valued at $706,000 in the aggregate. The 2002 issuances included 127,550 shares in connection with vendor settlements and 98,841 shares related to discontinued operations. In addition, 888,810 shares of Class A common stock were issued during 2002 in lieu of cash interest payments on Senior Convertible Notes and subordinated debentures valued at $1.8 million in the aggregate. UNDESIGNATED PREFERRED SHARES The Company is authorized, without further stockholder approval; to issue authorized but unissued shares of preferred stock in one or more classes or series. At December 31, 2004 and 2003, 60,000,000 authorized shares of undesignated preferred stock were available for creation and issuance in this manner. (12) STOCK OPTIONS A summary of the Company's stock option activity and weighted average exercise prices is as follows: FOR THE YEAR ENDED DECEMBER 31, 2004 2003 2002 --------------------- ----------------------- ---------------------- WEIGHTED WEIGHTED WEIGHTED AVERAGE AVERAGE AVERAGE EXERCISE EXERCISE EXERCISE OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE --------- -------- ---------- -------- -------- --------- Options outstanding at beginning of period................. 4,881,980 $4.00 2,773,446 $6.80 1,855,781 $13.51 Options granted..................... 441,000 $1.37 2,470,131 $1.14 1,285,300 $1.04 Options canceled.................... (186,417) $3.92 (290,047) $7.23 (367,732) $20.44 Options exercised................... (44,300) $0.75 (71,550) $0.98 97 - --------- -------- ---------- -------- --------- ------ Options outstanding at end of period....................... 5,092,263 $3.80 4,881,980 $4.00 2,773,446 $0.67 ========= ======== ========== ======== ========= ====== Options exercisable at period end... 3,318,729 2,200,787 1,174,560 ========= ========== ========= Weighted average fair value of options granted during the period.............................. $0.90 $0.90 $0.93 ========= ========== ========= The following table summarizes information about stock options outstanding and exercisable at December 31, 2004: OPTIONS OUTSTANDING OPTIONS EXERCISABLE ------------------------------------- ------------------------- WEIGHTED AVERAGE WEIGHTED WEIGHTED REMAINING AVERAGE AVERAGE RANGE OF EXERCISE NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE PRICES OUTSTANDING LIFE PRICE EXERCISABLE PRICE ------------ ----------- --------- ----------- -------- $0.53-0.70................................ 489,650 7.80 $.54 432,150 $0.53 $0.98-1.45................................ 3,203,527 8.00 $1.18 1,575,030 $1.08 $1.50-2.20................................ 680,404 6.00 $2.12 608,245 $2.17 $2.30-3.40................................ 24,957 7.10 $2.82 17,263 $2.84 $3.80-5.31................................ 96,157 4.20 $4.44 92,230 $4.45 $5.80-8.13................................ 32,723 3.40 $6.20 29,525 $6.20 $9.06-13.44............................... 218,627 5.10 $12.31 218,377 $12.31 $14.69-20.00.............................. 253,785 4.20 $17.00 253,476 $17.00 $23.36-35.00.............................. 42,707 3.10 $34.97 42,707 $34.97 $40.00-55.32.............................. 28,763 4.30 $51.08 28,763 $51.08 $63.10-74.61.............................. 1,544 5.40 $72.39 1,544 $72.39 $118.60-175.00............................ 18,194 5.10 $155.84 18,194 $155.84 $190.00-193.03............................ 957 4.20 $192.71 957 $192.71 $294.80-294.80............................ 268 0.20 $294.80 268 $294.80 ------------ ----------- --------- ----------- -------- 5,092,263 7.20 $3.80 3,318,729 $5.14 ============ =========== ========= =========== ======== 59 On November 14, 2000, the Company offered to certain employees, officers and directors, including the executive mentioned above, other than the chairman, the right to re-price certain outstanding stock options to an exercise price equal to $16.90, the closing price of the Company's Class A common stock on NASDAQ on November 14, 2000. Options to purchase an aggregate of up to 632,799 shares were repriced. As of December 31, 2001 options to purchase 532,595 shares were outstanding. The re-priced options will vest at the same rate that they would have vested under their original terms except that shares issuable upon exercise of these options were not able to be sold until after November 14, 2001. Pursuant to FIN 44, since the new exercise price was equal to the fair market value of the Company's common stock on the new measurement date, the Company did not record any compensation cost in connection with this program. However, depending upon movements in the market value of the Company's Class A common stock, this accounting treatment may result in significant non-cash compensation charges in future periods. To date, the Company has not recorded any compensation charge as the fair market value of the Company's common stock has been below the new exercise price. (13) EMPLOYEE STOCK AND SAVINGS PLANS 401 (K) PLAN On January 3, 2000, the Company established a 401(k) Plan ("the plan"). Subject to Internal Revenue Service Code limitations, participants may contribute from 1% to 15% of pay each pay period on a before tax basis, subject to statutory limits. Such contributions are fully and immediately vested. The Company will match 50% of the first 6% of an employee's contribution with shares of Class A common stock. Vesting of the Company's matching contributions begins at 20% after the first anniversary of date of hire or plan commencement date, whichever is later, increasing by 20% each year thereafter through the fifth year until full vesting occurs. The Company's matching contributions of 273,129, 531,545, and 314,642 shares of Class A common stock, for the years ended December 31, 2004, 2003 and 2002 resulted in compensation expense of $400,000, $492,000, and $437,000, respectively. Due to the acquisition of STI, the Company has various pension plans in other countries. The participants may contribute from 2.5% to 10.5% of pay each period on a before tax basis, subject to statutory limits. Such contributions are fully and immediately vested. The Company will match 4.5% up to 20% of a participant's contribution. Vesting of the Company's matching contribution is immediate. The Company's matching contributions for the years ended December 31, 2004, 2003 and 2002 amounted to $344,049, $210,000 and $454,000, respectively. (14) RESTRUCTURING CHARGES During 2003 and 2002, restructuring charges of $1.5 million and $2.3 million, respectively, were recorded by the Company related to the relocation and consolidation of its New Jersey-based office facilities into one location and a similar consolidation of its office facilities in England. The relocation process was completed in the first 6 months of 2003. The restructuring charges are comprised of abandonment costs with respect to leases, including the write-off of leasehold improvements. In 2004, based upon revised estimates of the previously recorded abandonment costs, largely due to a negotiated settlement of liability on one lease, $350,000 of restructuring charges were reversed. 60 The following sets forth the activity in the Company's restructuring reserve (in thousands): FOR THE YEAR ENDED DECEMBER 31, 2004 -------------------------------------------------- BEGINNING CURRENT YEAR CURRENT YEAR ENDING BALANCE PROVISION UTILIZATION BALANCE (REVERSAL) ---------- ------------ ------------ ------- Lease abandonments............................................ $2,747 $(350) $(1,494) $ 903 ========== ============ ============ ======= FOR THE YEAR ENDED DECEMBER 31, 2003 -------------------------------------------------- BEGINNING CURRENT YEAR CURRENT YEAR ENDING BALANCE PROVISION UTILIZATION BALANCE (REVERSAL) ---------- ------------ ------------ ------- Employee termination benefits................................. $140 $(129) $(11) - Lease abandonments............................................ 2,175 1,607 (1,035) 2,747 Other exit costs.............................................. 47 - (47) - ---------- ------------ ------------ ------- $2,362 $1,478 $(1,093) $2,747 ========== ============ ============ ======= FOR THE YEAR ENDED DECEMBER 31, 2002 -------------------------------------------------- BEGINNING CURRENT YEAR CURRENT YEAR ENDING BALANCE PROVISION UTILIZATION BALANCE (REVERSAL) ---------- ------------ ------------ ------- Employee termination benefits................................. $228 - $(88) 140 Lease abandonments............................................ 539 2,143 (507) 2,175 Asset disposals............................................... - 162 (162) - Other exit costs.............................................. 32 15 - 47 ---------- ------------ ------------ ------- $799 $2,320 $(757) $2,362 ========== ============ ============ ======= (15) INCOME TAXES The provision for income taxes in 2004 consist of the following: Current taxes: Federal $1,600 State 300 -------- $1,900 There is no tax provision for 2003 and 2002 since the Company has incurred losses for tax purposes in those years and since inception. Although the Company has tax loss carryforwards which could have offset its taxable income in 2004, the availability of such net operating loss carryforwards to offset income in the current period and in the future has been determined to be significantly limited. As a result of numerous historical equity transactions, the Company has experienced "ownership changes," as defined by Section 382 of the Internal Revenue Code of 1986, as amended (the "Code") and accordingly, the utilization of net operating loss carryforwards is limited under the change in stock ownership rules of the Code. Accordingly, the December 31, 2004 and 2003 deferred tax assets disclosed below have been adjusted to reflect the Section 382 limitation. As of December 31, 2004 and 2003, the Company had approximately $9.2 million and $10.9 of federal net operating loss carryforward available to offset future taxable income after considering the limitations under the change in stock ownership rules of the Code. Such carryforward expires ratably through 2023. Additionally, the Company had $3.9 million and $4.3 million, respectively, of foreign net operating loss carryforwards at December 31, 2004 and 2003, which had no expiration date. The elimination of outstanding debt in 2003 resulted in substantial income from cancellation of debt for income tax purposes. The Company intends to minimize its income tax payable as a result of the restructuring by, among other things, offsetting the income with its historical net operating losses and otherwise reducing the income in accordance with applicable income tax rules. Although the relevant tax authorities may challenge the Company's income tax positions, the Company does not expect to incur any material current income tax liability from the elimination of this debt. See Note 18. 61 The difference between the statutory federal income tax rate and the Company's effective tax rate for the year ending December 31, 2004 is principally due to the utilization of federal and state net operating losses. For the year ending December 31, 2003 reduction of income in accordance with applicable tax rules, and net operating losses for which no tax benefit was recorded, resulted in the difference between the statutory federal income tax rate and the Company's effective tax rate. The effects of temporary differences and tax loss carryforwards that give rise to significant portions of deferred tax assets and deferred tax liabilities at December 31, 2004 and 2003 are presented below, in thousands. DECEMBER 31, ----------------------- 2004 2003 ---------- ---------- Deferred tax assets(liabilities): Net operating loss carryforwards..................................................... $ 4,845 $ 5,657 Accounts receivable principally due to allowance for doubtful accounts............... 1,345 1,576 Plant and equipment, principally due to differences in depreciation.................. (582) (208) Write down of assets and investments................................................. (665) (1,263) Accrued expenses..................................................................... 411 199 Restructuring reserve................................................................ 361 790 Other................................................................................ (210) - ---------- ---------- Gross deferred tax assets............................................................ 5,505 6,751 Less: valuation allowance............................................................ (5,505) (6,751) ---------- ---------- Net deferred tax assets........................................................ $ - $ - ========== ========== Based upon the level of historical losses and after considering projections for future taxable income over the periods in which the deferred tax assets are expected to be deductible, the Company has recorded a full valuation allowance against its net deferred tax assets, including the remaining net operating loss carryforward, since it believes that it is not more likely that not that these assets will be realized. (16) VALUATION AND QUALIFYING ACCOUNTS Additions and write-offs charged to the allowance for doubtful accounts is presented below, in thousands. ADDITIONS BALANCE AT CHARGED TO BALANCE BEGINNING OF COSTS AND ADDITIONS FROM DEDUCTIONS/ AT END ALLOWANCE FOR DOUBTFUL ACCOUNTS YEAR EXPENSES ACQUISITIONS WRITE-OFFS OF PERIOD ------------ ---------- -------------- ----------- ---------- For the year ended December 31, 2002............. $ 14,547 $2,596 $ -- $9,091 $ 8,052 For the year ended December 31, 2003............. $ 8,052 $ 1 $ -- $3,229 $ 4,824 For the year ended December 31, 2004............. $ 4,824 $ 410 $ -- $1,284 $ 3,950 (17) COMMITMENTS AND CONTINGENCIES MASTER CARRIER AGREEMENT In connection with the acquisition of the EasyLink Services business from AT&T Corporation in 2001, the Company entered into a Master Carrier Agreement with AT&T. Under this agreement, AT&T has provided the Company with a variety of telecommunications services that are required in connection with the provision of the Company's services. In April, 2004, the Company entered into a Data Service Terms and Pricing attachment (the "MCA Attachment") to the Master Carrier Agreement for the renewed purchase of private line and satellite services for a minimum term of 18 months with an option by the Company to extend the term up to an additional 12 months. Under the MCA Attachment, the Company has a minimum purchase commitment for services equal to $3.6 million over the initial contract period of 18 months. If the Company terminates the network connection services or the private line and satellite services prior to the end of the applicable term or AT&T terminates the services for the Company's breach, the Company must pay to AT&T a termination charge equal to 50% of the unsatisfied minimum purchase commitment for these services for the period in which termination occurs plus 50% of the minimum purchase commitment for each remaining commitment period in the term. If the Company decides to exercise the option at the end of the initial contract period, there is no minimum purchase commitment and the service term is on a month-to-month basis. During 2003, the Company entered into a separate agreement for a term of 36 months ending in September 2006 for switched services from AT&T which includes a minimum revenue commitment of $120,000 per year. The Company has complied with the annual minimum revenue commitment for switched services through the annual period ending September 2004. 62 OTHER TELECOMMUNICATIONS SERVICES The Company has committed to purchase from MCI Worldcom a minimum of $900,000 per year in other telecommunications services through January 2007. LEGAL PROCEEDINGS From time to time the Company has been, and expects to continue to be, subject to legal proceedings and claims in the ordinary course of business. These include claims of alleged infringement of third-party patents, trademarks, copyrights, domain names and other similar proprietary rights; employment claims; claims alleging unsolicited commercial faxes sent on behalf of the Company's customers; and contract claims. These claims include claims that some of the Company's services employ technology covered by third party patents. These claims, even if not meritorious, could require us to expend significant financial and managerial resources. No assurance can be given as to the outcome of one or more claims of this nature. If an infringement claim were determined in a manner adverse to the Company, it may be required to discontinue use of any infringing technology, to pay damages and/or to pay ongoing license fees which would increase the costs of providing service. In connection with the termination of an agreement to sell the portal operations of the Company's discontinued India.com business, the Company brought suit against a broker that it had engaged in connection with the proposed sale of the portal operations alleging, among other things, breach of contract and misrepresentation. The broker brought a counterclaim against the Company for a brokerage fee that would have been payable on the closing of the proposed sale. The court entered a judgment in the amount of $931,000 against the Company. In response to the judgment, the Company filed a motion to alter the judgment in which the Company, among other things, requested that the Court vacate the judgment or reduce the amount of damages. On February 20, 2003, the Court vacated the original judgment and entered a declaratory judgment in EasyLink's favor that EasyLink does not owe the broker any fee or other compensation arising from the failed sale of the portal operations. On March 13, 2003, the broker filed a motion to amend the judgment or for a new trial requesting, among other things, re-instatement of the original judgment or, in the alternative, a new trial. On September 10, 2003, the Court reinstated the previously vacated judgment in favor of the broker in the original amount of $931,000. The Company filed for an appeal. The Court has permitted the Company, in lieu of posting an appeal bond, to place $400,000 into a trust account to provide funds for the payment of the judgment if upheld on appeal. The Company has paid in full the $400,000 into the trust account. Oral arguments on the appeal occurred on September 22, 2004, and the parties await the decision of the Court of Appeals. No assurance can be given as to the Company's likelihood of success or its ultimate liability, if any, in connection with this matter. The Company previously reported that the staff of the US Securities and Exchange Commission was reviewing certain transactions accounting for approximately $4.8 million of revenue generated by its former advertising network business in 2000, a year in which the Company reported $61.2 million in total revenue. The Company announced that it has reached a settlement of the matter with the SEC. Under the settlement, the Company agreed to the entry of an SEC order requiring that it cease and desist from violations of certain reporting, record keeping and internal control provisions of the federal securities laws. The Company settled without admitting or denying the statements made in the SEC's findings. The order does not impose any fine or other penalty upon EasyLink and does not require restatement of any of EasyLink's historical financial statements. On January 28, 2005, Steven Brin instituted a third party complaint against the Company and four other companies and two individuals for implied indemnification and/or contribution. The case was filed in the Circuit Court of Cook County, Illinois, County Department, Chancery Division, Case No. 03 CH 13062. In the underlying action against Mr. Brin in the same case, titled Jerold Rawson et al. v. Steven Brin et al.,the plaintiffs filed a putative class action against Mr. Brin and the other defendants for allegedly sending or causing to be sent unsolicited advertisements to telephone facsimile machines in violation of the federal Telephone Consumer Protection Act, 47 U.S.C. ss. 227, the Illinois Consumer Fraud and Deceptive Business Practices Act and common law conversion and trespass. Mr. Brin has denied liability to the plaintiffs. Mr. Brin alleges in the third party complaint filed against the Company and the other third-party defendants, however, that, if he is found liable to the plaintiffs in the underlying complaint, then the Company and the other third party defendants should be held liable to Mr. Brin for implied indemnification and/or contribution. The Company has until April 13, 2005 to file its answer or otherwise plead to the third-party complaint, absent an extension. The plaintiff in the underlying lawsuit made an offer to the defendants to settle the claim for $30,000. Although we intend to defend this lawsuit vigorously, we cannot assure you that our ultimate liabiity, if any, in connection with this matter will not have a material effect on our results of operations, financial condition or cash flow. 63 OTHER The Company's tax filings may be subject to challenge by various tax authorities. See Note 15. Although the Company believes its tax positions are in accordance with the relevant laws and regulations, they may be subject to interpretation by such authorities. The Company cannot predict whether any changes to its anticipated tax positions and filings could impact its results of operations, financial condition or cash flows. (18) QUARTERLY FINANCIAL INFORMATION - UNAUDITED Condensed Quarterly Consolidated Statements of Operations (in thousands, except per share data) 2004 2003 -------------------------------------- -------------------------------------- FOURTH THIRD SECOND FIRST FOURTH THIRD SECOND FIRST QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER -------- -------- -------- -------- -------- -------- -------- -------- Revenues...................... $ 20,941 $ 22,509 $ 24,053 $ 24,336 $ 24,738 $25,065 $ 25,802 $ 25,742 Cost of revenues.............. 8,207 8,428 9,764 10,325 11,622 10,863 13,361 13,707 -------- -------- -------- -------- -------- -------- -------- -------- Gross profit.................. 12,734 14,081 14,289 14,011 13,116 14,202 12,441 12,035 Operating expenses............ 12,680 8,024 12,595 13,141 12,571 12,760 12,787 14,595 -------- -------- -------- -------- -------- -------- -------- -------- Income(loss) from operations............... 54 6,057 1,694 870 545 1,442 (346) (2,560) Gain from debt restructuring................. 984 -- -- 412 -- 47,026 6,640 Other income/(expense), net........................... (75) (1,566) (400) (17) (116) (75) (304) (778) -------- -------- -------- -------- -------- -------- -------- -------- Income from continuing operations......... 963 4,491 1,294 853 841 1,367 46,376 3,302 -------- -------- -------- -------- -------- -------- -------- -------- Loss from discontinued operations.................... -- -- -- -- (100) (838) -- -- -------- -------- -------- -------- -------- -------- -------- -------- Net income.................... $ 963 $ 4,491 $ 1,294 $ 853 $ 741 $ 529 $46,376 $ 3,302 ======== ======== ======== ======== ======== ======== ======== ======== Basic and diluted income (loss) per share: Income from continuing operations......... $ 0.02 $ 0.10 $ 0.03 $ 0.02 $ 0.02 $ 0.03 $ 1.28 $ 0.19 Loss from discontinued operations.................... -- -- -- -- -- (0.02) -- -- -------- -------- -------- -------- -------- -------- -------- -------- Net income.................... $ 0.02 $ 0.10 $ 0.03 $ 0.02 $ 0.02 $ 0.01 $ 1.28 $ 0.19 ======== ======== ======== ======== ======== ======== ======== ======== Due to changes in the number of shares outstanding, quarterly loss per share amounts do not necessarily add to the totals for the years. 64 (19) GEOGRAPHIC DISCLOSURE GEOGRAPHIC INFORMATION FOR THE YEARS ENDED ----------------------------------- 2004 2003 2002 --------- --------- ----------- United States: Revenues................................................................ $ 67,973 $ 77,019 $ 89,356 Operating income (loss)................................................. 2,517 (175) (84,543) Total assets............................................................ 50,624 49,408 58,704 Long lived assets....................................................... 22,335 27,585 34,317 All other regions: Revenues................................................................ 23,867 24,328 24,998 Operating income (loss)................................................. 1,143 (742) (2,390) Total assets............................................................ (98) 4 2,307 Long lived assets....................................................... 901 951 1,544 ------------------------------------------------------------------------------------------------------------- Significant country included in all other regions United Kingdom: Revenues................................................................ 20,516 20,463 20,940 Operating income (loss)................................................. 1,713 172 (1,798) Total assets............................................................ 1,713 1,176 2,453 Long lived assets....................................................... 575 541 938 Geographic data is classified based on the location of the Company's operation that provides selling and general account maintenance of the customer's accounts. ITEM 9 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not applicable. ITEM 9A. CONTROLS AND PROCEDURES As of the end of the period covered by this report, the Company's management, with the participation of our Chief Executive Officer and President (principal executive officer) and Vice President and Chief Financial Officer (principal financial officer), carried out an evaluation of the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934). Based upon that evaluation, our Chief Executive Officer and President (principal executive officer) and Vice President and Chief Financial Officer (principal financial officer) concluded that these disclosure controls and procedures were effective as of the end of the period covered in this report. In addition, no change in our internal control over financial reporting (as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934) occurred during the fourth quarter of our fiscal year ended December 31, 2004 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. ITEM 9B. OTHER INFORMATION Not applicable. 65 PART III The information required by Items 10 through 14 in this part is omitted pursuant to Instruction G of Form 10-K, and will be included in an amendment to this Form 10-K or in a definitive Proxy Statement, pursuant to Regulation 14A, not later than 120 days after December 31, 2004. PART IV ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES Exhibits. Some of the exhibits referenced below are incorporated by reference to filings made by EasyLink Services Corporation before the date hereof. 66 2.1+ Agreement and Plan of Merger dated as of December 11, 1999 by and among Mail.com, Inc., Mast Acquisition Corp. and NetMoves Corporation. (Incorporated by reference to Exhibit 2.1 of Mail.com, Inc.'s Current Report on Form 8-K filed December 16, 1999) 2.2 Form of Company Voting Agreement dated as of December 11, 1999 by and between Mail.com, Inc. and certain directors and officers of NetMoves Corporation. (Incorporated by reference to Exhibit 2.2 of Mail.com, Inc.'s Current Report on Form 8-K filed on December 16, 1999) 2.3+ Agreement and Plan of Merger dated as of March 14, 2000 by and among Mail.com, Inc., Asia.com, Inc., eLong.com, Inc. and the Stockholders of eLong.com, Inc. (Incorporated by reference to Exhibit 2.1 of Mail.com, Inc.'s Current Report on Form 8-K filed on March 28, 2000) 2.4+ Agreement and Plan of Merger by and among Mail.com, Inc., ML Acquisition Corp., Swift Telecommunications, Inc. ("STI") and George Abi Zeid, as sole shareholder of STI, dated as of January 31, 2001. (Incorporated by reference to Exhibit 2.1 of Mail.com, Inc.'s Current Report on Form 8-K filed February 8, 2001) 2.5 Letter Agreement dated January 31, 2001 between Mail.com, Inc. and George Abi Zeid relating to Telecom International, Inc. (Incorporated by reference to Exhibit 2.2 of Mail.com, Inc.'s Current Report on Form 8-K filed February 8, 2001) 2.6 Letter Agreement dated January 31, 2001 between Mail.com, Inc. and George Abi Zeid relating to the 25% minority interests in Xtreme Global Communications (S) Pte Ltd. and Xtreme Global Communications Sdn Bhd. (Incorporated by reference to Exhibit 2.3 of Mail.com, Inc.'s Current Report on Form 8-K filed February 8, 2001) 2.7+ Asset Purchase dated December 14, 2000 between AT&T Corp. and Swift Telecommunications, Inc. (Incorporated by reference to Exhibit 2.1 of Mail.com, Inc.'s Current Report on Form 8-K filed March 9, 2001) 2.8+ Asset Purchase Agreement dated as of March 30, 2001 by and among Mail.com, Inc. and Net2Phone EMail, Inc. (Incorporated by reference to Exhibit 2.8 of EasyLink Services Corporation's Annual Report on Form 10-K for the year ended December 31, 2001) 3.1 Amended and Restated Certificate of Incorporation (Incorporated by reference to Exhibit 4.1 of Mail.com, Inc.'s Registration Statement on Form S-8 filed June 19, 2000) 3.2 Certificate of Amendment of Amended and Restated Certificate of Incorporation (Incorporated by reference to Exhibit 4.2 of Mail.com, Inc.'s Registration Statement on Form S-8 filed June 19, 2000) 3.3 Certificate of Ownership and Merger (Incorporated by reference to Exhibit 3.3 of EasyLink Services Corporation's Annual Report on Form 10-K for the year ended December 31, 2001) 3.4 Certificate of Amendment of Amended and Restated Certificate of Incorporation (Incorporated by reference to Exhibit 4.1 of EasyLink Services Corporation's Current Report on Form 8-K filed January 22, 2002) 3.5 By-Laws (Incorporated by reference to Exhibit 10.3 of EasyLink Services Corporation's Current Report on Form 8-K filed April 5, 2005) 4.1 Specimen Class A common stock certificate (Incorporated by reference to Exhibit 10.9 to EasyLink Services Corporation's Annual Report on Form 10-K for the year ended December 31, 2001) 10.1 Employment Agreement between EasyLink Services Corporation and Thomas Murawski dated February 1, 2002. (Incorporated by reference to Exhibit 10 to Amendment No. 1 to EasyLink Service Corporation's Registration Statement on Form S-3, Registration No. 333-76578) 10.2 Amendment No. 1 dated as of August 8, 2003 to Employment Agreement between Thomas Murawski and the Company (Incorporated by reference to Exhibit 10.1 of EasyLink Services Corporation's Current Report on Form 10-Q filed August 14, 2003) 10.3 10.3.1 Employment Agreement between EasyLink Services Corporation and Gerald Gorman dated November 12, 2002. (Incorporated by reference to Exhibit 10 to EasyLink Services Corporation's Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2002) 10.3.2 Amendment No. 1 dated November 12, 2003 to Employment Agreement between EasyLink Services Corporation and Gerald Gorman (Incorporated by reference to Exhibit 10.1 to EasyLink Services Corporation's Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2003) 10.3.3 +Domain Portfolio Purchase Agreement made the 23rd day of December, 2004, by and among Easylink Services Corporation; NJ Domains LLC; and Gerald Gorman (Incorporated by reference to Exhibit 10.1 to EasyLink Services Corporation's Current Report on Form 8-K filed December 28, 2004)+ 67 10.3.4 Guaranty of Domain Portfolio Purchase Agreement made and delivered the 23rd day of December, 2004, by Gerald Gorman in favor of EasyLink Services Corporation (Incorporated by reference to Exhibit 10.2 to EasyLink Services Corporation's Current Report on Form 8-K filed December 28, 2004) 10.3.5 Amendment No. 2 dated December 23, 2004 to Employment Agreement dated November 12, 2002 between EasyLink Services Corporation and Gerald Gorman (Incorporated by reference to Exhibit 10.3 to EasyLink Services Corporation's Current Report on Form 8-K filed December 28, 2004) 10.3.6 Severance Agreement made the 23rd day of December, 2004, by and between Gerald Gorman and Easylink Services Corporation (Incorporated by reference to Exhibit 10.4 to EasyLink Services Corporation's Current Report on Form 8-K filed December 28, 2004) 10.3.7 Release made and delivered the 23rd day of December, 2004 by Gerald Gorman in favor of EasyLink Services Corporation (Incorporated by reference to Exhibit 10.5 to EasyLink Services Corporation's Current Report on Form 8-K filed December 28, 2004) 10.3.8 Release made and delivered the 23rd day of December, 2004 by EasyLink Services Corporation in favor of Gerald Gorman (Incorporated by reference to Exhibit 10.6 to EasyLink Services Corporation's Current Report on Form 8-K filed December 28, 2004) 10.4 10.4.1 Employment Agreement dated February 23, 2001 between Mail.com and George Abi Zeid. (Incorporated by reference to Exhibit 10.1 of Mail.com, Inc.'s Current Report on Form 8-K filed March 9, 2001) 10.4.2 Amendment dated June 1, 2003 to Employment Agreement between EasyLink Services Corporation and George Abi Zeid (Incorporated by reference to Exhibit 10.4 to EasyLink Services Corporation's Annual Report on Form 10-K filed March 30, 2004) 10.4.3 Separation Agreement between EasyLink Services Corporation and George Abi Zeid dated January 28, 2005 (Incorporated by reference to Exhibit 10.6 to EasyLink Services Corporation's Current Report on Form 8-K filed January 28, 2005) 10.4.4 Reaffirmation Agreement made as of July 23, 2004, by and among EasyLink Services Corporation (f/k/a Mail.com, Inc.), a Delaware corporation, Swift Telecommunications, Inc., a Delaware corporation, and George Abi Zeid (Incorporated by reference to Exhibit 10.1 to EasyLink Services Corporation's Quarterly Report on Form 10-Q filed August 16, 2004) 10.5 Employment Agreement between EasyLink Services Corporation and Michael A. Doyle dated March 22, 2004 (Incorporated by reference to Exhibit 10.5 to EasyLink Services Corporation's Annual Report on Form 10-K filed March 30, 2004) 10.6 10.6.1 Employment Agreement between Mail.com, Inc. and Debra McClister dated April 1, 1999 (Incorporated by reference to Exhibit 10.4 to the IPO Registration Statement) 10.6.2 Letter Agreement between EasyLink Services Corporation and Debra McClister dated March 30, 2005 (Incorporated by reference to Exhibit 10.2 of EasyLink Services Corporation's Current Report on Form 8-K filed April 5, 2005) 10.7 Employment Agreement between Mail.com, Inc. and David Ambrosia dated May 19, 1999 (Incorporated by reference to Exhibit 10.6 to the IPO Registration Statement) 10.8 2004 Executive Incentive Plan - Level 1 (applicable to Chief Executive Officer) (Incorporated by reference to Exhibit 10.8 to EasyLink Services Corporation's Annual Report on Form 10-K filed March 30, 2004) 10.9 2004 Executive Incentive Plan - Level 1 International (applicable to President - International Operations) (Incorporated by reference to Exhibit 10.9 to EasyLink Services Corporation's Annual Report on Form 10-K filed March 30, 2004) 10.10 2004 Executive Incentive Plan - Level 2 (applicable to other named executive officers) (Incorporated by reference to Exhibit 10.10 to EasyLink Services Corporation's Annual Report on Form 10-K filed March 30, 2004) 10.11 2004 Executive Incentive Plan - Vice President of Sales (Incorporated by reference to Exhibit 10.11 to EasyLink Services Corporation's Annual Report on Form 10-K filed March 30, 2004) 10.12 Stock Option Agreement between Mail.com, Inc. and Gerald Gorman dated December 31, 1996. (Incorporated by reference to Exhibit 10.11 to the IPO Registration Statement) 10.13 Stock Option Agreement between Mail.com, Inc. and Gerald Gorman dated June 1, 1996. (Incorporated by reference to Exhibit 10.12 to the IPO Registration Statement) 68 10.14 1996 Employee Stock Option Plan (Incorporated by reference to Exhibit 10.14 to the IPO Registration Statement) 10.15 1997 Employee Stock Option Plan. (Incorporated by reference to Exhibit 10.15 to the IPO Registration Statement) 10.16 1998 Employee Stock Option Plan. (Incorporated by reference to Exhibit 10.16 to the IPO Registration Statement) 10.17 1999 Employee Stock Option Plan. (Incorporated by reference to Exhibit 10.17 to the IPO Registration Statement) 10.18 Mail.com, Inc. Supplemental 1999 Stock Option Plan. (Incorporated by reference to Exhibit 10.2 of Mail.com, Inc.'s Registration Statement on Form S-8 filed June 19, 2000) 10.19 Mail.com, Inc. Allegro Group Stock Option Plan. (Incorporated by reference to Exhibit 10.iii(A)(1) of Mail.com, Inc.'s Quarterly Report on Form 10-Q for the quarterly period ended September 30, 1999) 10.20 Mail.com, Inc. TCOM Stock Option Plan. (Incorporated by reference to Exhibit 10.iii(A)(2) of Mail.com, Inc.'s Quarterly Report on Form 10-Q for the quarterly period ended September 30, 1999) 10.21 Mail.com, Inc. 2000 Stock Option Plan. (Incorporated by reference to Exhibit 10.1 of Mail.com, Inc.'s Registration Statement on Form S-8 filed June 19, 2000) 10.22 Mail.com, Inc. Supplemental 2000 Stock Option Plan. (Incorporated by reference to Exhibit 10.3 of Mail.com, Inc.'s Registration Statement on Form S-8 filed June 19, 2000) 10.23 EasyLink Services Corporation 2001 Stock Option Plan. (Incorporated by reference to Appendix B to Definitive Proxy Statement of EasyLink Services Corporation filed on April 27, 2001) 10.24 EasyLink Services Corporation 2002 Stock Option Plan. (Incorporated by reference to Appendix A to Definitive Proxy Statement of EasyLink Services Corporation's filed on April 23, 2002) 10.25 EasyLink Services Corporation 2003 Stock Option Plan. (Incorporated by reference to Appendix A to Definitive Proxy Statement of EasyLink Services Corporation's filed on July 1, 2003) 10.26 1990 Stock Option Plan (Incorporated by reference to Exhibit 10.3 to NetMoves Corporation's Registration Statement on Form S-1, Registration No. 333-09613 ("NetMoves Registration Statement")) 10.27 1996 Stock Option/Stock Issuance Plan (Incorporated by reference to Exhibit 10.4 to the NetMoves Registration Statement) 10.28 Description of Stock Option Issued to Thomas Murawski (Incorporated by reference to Form of Notice To Record Shareholders of Mail.com, Inc. contained in Exhibit 99.1 of Mail.com, Inc.'s Current Report on Form 8-K filed January 17, 2001) 10.29 Form of Indemnification Agreement for Directors and Officers (Incorporated by reference to Exhibit 10.1 of the Company's Quarterly Report on Form 10-Q filed May 15, 2003) 10.30 10.30.1 Form of Stock Option Agreement for options granted under the Company's stock option plans (version providing 6 month period to exercise following termination for reasons other than cause or performance) 10.30.2 Form of Stock Option Agreement for options granted under the Company's stock option plans (version providing 12 month period to exercise following termination for reasons other than cause or performance) 10.30.3 Form of Stock Option Agreement for options granted under the Company's stock option plans (version providing 18 month period to exercise following termination for reasons other than cause or performance) 10.30.4 Form of Stock Option Agreement for options granted under the Company's stock option plans (version providing 24 month period to exercise following termination for reasons other than cause or performance) 10.30.5 Form of Stock Option Agreement for options granted under the Company's stock option plans (version providing 60 day period to exercise following termination for reasons other than cause or performance) 10.31 Lease Agreement between EasyLink Services Corporation and BT Piscataway, LLC dated July 23, 2003 relating to leased premises at the Company's headquarters located at 33 Knightsbridge Road, Piscataway, New Jersey (Incorporated by reference to Exhibit 10.33 to EasyLink Services Corporation's Annual Report on Form 10-K filed March 30, 2004) 10.32 Designation Letter dated January 8, 2001 from Mail.com, Inc. to Federal Partners, L.P. (Incorporated by reference to Exhibit 99.4 of Mail.com, Inc.'s Current Report on Form 8-K filed January 10, 2001) 69 10.33 10.33.1+ Credit Agreement by and among EasyLink Services Corporation, EasyLink Services USA, Inc., Swift Telecommunications, Inc., EasyLink Services International, Inc. and Wells Fargo Foothill, Inc. dated as of December 9, 2004+(Incorporated by reference to Exhibit 10.1 to EasyLink Services Corporation's Current Report on Form 8-K filed December 20, 2004) 10.33.2 First Amendment to Credit Agreement entered into as of March 30, 2005 by and among Wells Fargo Foothill, Inc., EasyLink Services Corporation, Swift Telecommunications, Inc., EasyLink Services USA, Inc., EasyLink Services International, Inc. (Incorporated by reference to Exhibit 10.1 of EasyLink Services Corporation's Current Report on Form 8-K filed April 5, 2005) 10.33.3 Security Agreement dated as of December 9, 2004 by EasyLink Services Corporation in favor of Wells Fargo Foothill, Inc. (Incorporated by reference to Exhibit 10.2 to EasyLink Services Corporation's Current Report on Form 8-K filed December 20, 2004) 10.33.4 Security Agreement dated as of December 9, 2004 by EasyLink Services USA, Inc. in favor of Wells Fargo Foothill, Inc. (Incorporated by reference to Exhibit 10.3 to EasyLink Services Corporation's Current Report on Form 8-K filed December 20, 2004) 10.33.5 Security Agreement dated as of December 9, 2004 by Swift Telecommunications, Inc. in favor of Wells Fargo Foothill, Inc. (Incorporated by reference to Exhibit 10.4 to EasyLink Services Corporation's Current Report on Form 8-K filed December 20, 2004) 10.33.6 Security Agreement dated as of December 9, 2004 by EasyLink Services International, Inc. in favor of Wells Fargo Foothill, Inc. (Incorporated by reference to Exhibit 10.5 to EasyLink Services Corporation's Current Report on Form 8-K filed December 20, 2004) 10.33.7+ Pledge Agreement, dated as of December 9, 2004, made by Easylink Services Corporation in favor of Wells Fargo Foothill, Inc.+ (Incorporated by reference to Exhibit 10.6 to EasyLink Services Corporation's Current Report on Form 8-K filed December 20, 2004) 10.33.8+ Pledge Agreement, dated as of December 9, 2004, made by Easylink Services USA, Inc. in favor of Wells Fargo Foothill, Inc.+ (Incorporated by reference to Exhibit 10.7 to EasyLink Services Corporation's Current Report on Form 8-K filed December 20, 2004) 10.33.9* Pledge Agreement, dated as of December 9, 2004, made by Swift Telecommunications, Inc. in favor of Wells Fargo Foothill, Inc.+ (Incorporated by reference to Exhibit 10.8 to EasyLink Services Corporation's Current Report on Form 8-K filed December 20, 2004) 10.33.10+Intellectual Property Security Agreement, dated as of December 9, 2004, made by Easylink Services Corporation in favor of Wells Fargo Foothill, Inc.+(Incorporated by reference to Exhibit 10.9 to EasyLink Services Corporation's Current Report on Form 8-K filed December 20, 2004) 10.33.11+Intellectual Property Security Agreement, dated as of December 9, 2004, made by Easylink Services USA, Inc. in favor of Wells Fargo Foothill, Inc.+(Incorporated by reference to Exhibit 10.10 to EasyLink Services Corporation's Current Report on Form 8-K filed December 20, 2004) 10.46 Common Stock Purchase Agreement dated as of March 13, 2001, by and between Mail.com, Inc., and the purchaser listed therein. (Incorporated by reference to Exhibit 99.3 of Mail.com, Inc.'s Current Report on Form 8-K filed March 26, 2001) 10.47 Registration Rights Agreement dated as of March 13, 2001, by and between Mail.com, Inc. and the investor listed therein. (Incorporated by reference to Exhibit 99.4 of Mail.com, Inc.'s Current Report on Form 8-K filed March 26, 2001) 10.48 10.48.1 Amended and Restated Master Carrier Agreement between EasyLink Services Corporation and AT&T Corp. dated September 30, 2003 (including General Terms & Conditions) ("MCA") (Incorporated by reference to Exhibit 10.48.1 to EasyLink Services Corporation's Annual Report on Form 10-K filed March 30, 2004) 10.48.2 MCA Supplemental Terms & Conditions (incorporated by reference to MCA Supplemental Terms & Conditions attached to Master Carrier Agreement contained in Exhibit 2.3 to Current Reporton Form 8-K of EasyLink Services Corporation filed on March 9, 2001) 10.48.3* AT&T Network Connection Service Terms and Pricing Attachments (incorporated by reference to MCA Supplemental Terms & Conditions attached to Master Carrier Agreement contained in Exhibit 2.3 to Current Report on Form 8-K of EasyLink Services Corporation filed on March 9, 2001) 10.48.4* AT&T MEGACOM Service & AT&T MEGACOM 800 Service Terms and Pricing Attachment (Incorporated by reference to Exhibit 10.48.4 to EasyLink Services Corporation's Annual Report on Form 10-K filed March 30, 2004) 10.48.5* AT&T Managed Internet Service Terms and Pricing Attachment (Incorporated by reference to Exhibit 10.48.5 to EasyLink Services Corporation's Annual Report on Form 10-K filed March 30, 2004) 10.48.6* AT&T Private Line and Satellite Service Terms and Pricing Attachment (Incorporated by reference to Exhibit 10.48.6 to EasyLink Services Corporation's Annual Report on Form 10-K filed March 30, 2004) 70 10.48.7* AT&T Uniplan Service Terms and Pricing Attachment (Incorporated by reference to Exhibit 10.48.7 to EasyLink Services Corporation's Annual Report on Form 10-K filed March 30, 2004) 10.48.8* AT&T Asynchronous Transfer Mode Service - Service Order Attachment (Incorporated by reference to Exhibit 10.2 to EasyLink Services Corporation Form 10-Q filed on May 14, 2004) 10.48.9* AT&T Data Service Terms and Pricing Attachment (Incorporated by reference to Exhibit 10.3 to EasyLink Services Corporation Form 10-Q filed on May 14, 2004) 10.49 Warrant dated November 27, 2001 issued to GATX Financial Corporation to purchase 251,000 shares of Class A common stock at an exercise price of $6.10 per share (after giving effect to January 2002 reverse stock split) (Incorporated by reference to Exhibit 10.49 to EasyLink Services Corporation's Annual Report on Form 10-K filed March 30, 2004) 10.50 Warrant dated November 27, 2001 issued to GATX Financial Corporation to purchase 11,500 shares of Class A common stock at an exercise price of $6.10 per share (after giving effect to January 2002 reverse stock split) (Incorporated by reference to Exhibit 10.50 to EasyLink Services Corporation's Annual Report on Form 10-K filed March 30, 2004) 10.51 Warrant dated November 27, 2001 issued to CitiCapital Commercial Leasing Corporation to purchase 48,611 shares of Class A common stock at an exercise price of $6.10 per share (after giving effect to January 2002 reverse stock split) (Incorporated by reference to Exhibit 10.51 to EasyLink Services Corporation's Annual Report on Form 10-K filed March 30, 2004) 10.52 Warrant dated November 27, 2001 issued to Forsythe/McArthur Associates, Inc. to purchase 64,351 shares of Class A common stock at an exercise price of $6.10 per share (after giving effect to January 2002 reverse stock split) (Incorporated by reference to Exhibit 10.52 to EasyLink Services Corporation's Annual Report on Form 10-K filed March 30, 2004) 10.53 Warrant dated November 27, 2001 issued to Pentech Financial Services, Inc. to purchase 51,860 shares of Class A common stock at an exercise price of $6.10 per share (after giving effect to January 2002 reverse stock split) (Incorporated by reference to Exhibit 10.53 to EasyLink Services Corporation's Annual Report on Form 10-K filed March 30, 2004) 10.54 Warrant dated November 27, 2001 issued to Phoenix Leasing Incorporated to purchase 34,289 shares of Class A common stock at an exercise price of $6.10 per share (after giving effect to January 2002 reverse stock split) (Incorporated by reference to Exhibit 10.54 to EasyLink Services Corporation's Annual Report on Form 10-K filed March 30, 2004) 10.55 Warrant dated November 27, 2001 issued to George Abi Zeid to purchase 268,297 shares of Class A common stock at an exercise price of $6.10 per share (after giving effect to January 2002 reverse stock split) (Incorporated by reference to Exhibit 10.55 to EasyLink Services Corporation's Annual Report on Form 10-K filed March 30, 2004) 10.56 Warrant dated November 27, 2001 issued to Fleet Business Credit, LLC to purchase 66,3172 shares of Class A common stock at an exercise price of $6.10 per share (after giving effect to January 2002 reverse stock split) (Incorporated by reference to Exhibit 10.56 to EasyLink Services Corporation's Annual Report on Form 10-K filed March 30, 2004) 21 Subsidiaries of EasyLink Services Corporation 23 Consent of KPMG LLP 31.1 Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 31.2 Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 32.1 Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 32.2 Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. * Confidential treatment granted. + Disclosure schedules and other attachments are omitted, but will be furnished supplementally to the Commission upon request. Financial Statement Schedules None 71 Signatures Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on April 11, 2005. EasyLink Services Corporation (Registrant) By /s/ THOMAS F. MURAWSKI ------------------------- (Thomas F. Murawski, Chief Executive Officer and President) Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated on April 11, 2005. /s/ THOMAS F. MURAWSKI Chief Executive Officer and President, Director --------------------------- (Principal Executive Officer) (Thomas F. Murawski) /s/ MICHAEL A. DOYLE Vice President and Chief Financial --------------------------- Officer (Michael A. Doyle) (Principal Accounting and Financial Officer) /s/ DAVID W. AMBROSIA Executive Vice President, General Counsel --------------------------- and Secretary (David Ambrosia) /s/ ROBERT J. CASALE Director --------------------------- (Robert J. Casale) /s/ PETER J. HOLZER Director --------------------------- (Peter J. Holzer) /s/ GEORGE F. KNAPP Director --------------------------- (George F. Knapp) /s/ JOHN C. PETRILLO Director --------------------------- (John C. Petrillo) /s/ DENNIS R. RANEY Director --------------------------- (Dennis R. Raney) /s/ ERIC J. ZAHLER Director --------------------------- (Eric J. Zahler) 72 EXHIBIT INDEX Some of the exhibits referenced below are incorporated by reference to filings made by EasyLink Services Corporation before the date hereof. 2.1+ Agreement and Plan of Merger dated as of December 11, 1999 by and among Mail.com, Inc., Mast Acquisition Corp. and NetMoves Corporation. (Incorporated by reference to Exhibit 2.1 of Mail.com, Inc.'s Current Report on Form 8-K filed December 16, 1999) 2.2 Form of Company Voting Agreement dated as of December 11, 1999 by and between Mail.com, Inc. and certain directors and officers of NetMoves Corporation. (Incorporated by reference to Exhibit 2.2 of Mail.com, Inc.'s Current Report on Form 8-K filed on December 16, 1999) 2.3+ Agreement and Plan of Merger dated as of March 14, 2000 by and among Mail.com, Inc., Asia.com, Inc., eLong.com, Inc. and the Stockholders of eLong.com, Inc. (Incorporated by reference to Exhibit 2.1 of Mail.com, Inc.'s Current Report on Form 8-K filed on March 28, 2000) 2.4+ Agreement and Plan of Merger by and among Mail.com, Inc., ML Acquisition Corp., Swift Telecommunications, Inc. ("STI") and George Abi Zeid, as sole shareholder of STI, dated as of January 31, 2001. (Incorporated by reference to Exhibit 2.1 of Mail.com, Inc.'s Current Report on Form 8-K filed February 8, 2001) 2.5 Letter Agreement dated January 31, 2001 between Mail.com, Inc. and George Abi Zeid relating to Telecom International, Inc. (Incorporated by reference to Exhibit 2.2 of Mail.com, Inc.'s Current Report on Form 8-K filed February 8, 2001) 2.6 Letter Agreement dated January 31, 2001 between Mail.com, Inc. and George Abi Zeid relating to the 25% minority interests in Xtreme Global Communications (S) Pte Ltd. and Xtreme Global Communications Sdn Bhd. (Incorporated by reference to Exhibit 2.3 of Mail.com, Inc.'s Current Report on Form 8-K filed February 8, 2001) 2.7+ Asset Purchase dated December 14, 2000 between AT&T Corp. and Swift Telecommunications, Inc. (Incorporated by reference to Exhibit 2.1 of Mail.com, Inc.'s Current Report on Form 8-K filed March 9, 2001) 2.8+ Asset Purchase Agreement dated as of March 30, 2001 by and among Mail.com, Inc. and Net2Phone EMail, Inc. (Incorporated by reference to Exhibit 2.8 of EasyLink Services Corporation's Annual Report on Form 10-K for the year ended December 31, 2001) 3.1 Amended and Restated Certificate of Incorporation (Incorporated by reference to Exhibit 4.1 of Mail.com, Inc.'s Registration Statement on Form S-8 filed June 19, 2000) 3.2 Certificate of Amendment of Amended and Restated Certificate of Incorporation (Incorporated by reference to Exhibit 4.2 of Mail.com, Inc.'s Registration Statement on Form S-8 filed June 19, 2000) 3.3 Certificate of Ownership and Merger (Incorporated by reference to Exhibit 3.3 of EasyLink Services Corporation's Annual Report on Form 10-K for the year ended December 31, 2001) 3.4 Certificate of Amendment of Amended and Restated Certificate of Incorporation (Incorporated by reference to Exhibit 4.1 of EasyLink Services Corporation's Current Report on Form 8-K filed January 22, 2002) 3.5 By-Laws (Incorporated by reference to Exhibit 10.3 of EasyLink Services Corporation's Current Report on Form 8-K filed April 5, 2005) 4.1 Specimen Class A common stock certificate (Incorporated by reference to Exhibit 10.9 to EasyLink Services Corporation's Annual Report on Form 10-K for the year ended December 31, 2001) 10.1 Employment Agreement between EasyLink Services Corporation and Thomas Murawski dated February 1, 2002. (Incorporated by reference to Exhibit 10 to Amendment No. 1 to EasyLink Service Corporation's Registration Statement on Form S-3, Registration No. 333-76578) 10.2 Amendment No. 1 dated as of August 8, 2003 to Employment Agreement between Thomas Murawski and the Company (Incorporated by reference to Exhibit 10.1 of EasyLink Services Corporation's Current Report on Form 10-Q filed August 14, 2003) 10.3 10.3.1 Employment Agreement between EasyLink Services Corporation and Gerald Gorman dated November 12, 2002. (Incorporated by reference to Exhibit 10 to EasyLink Services Corporation's Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2002) 73 10.3.2 Amendment No. 1 dated November 12, 2003 to Employment Agreement between EasyLink Services Corporation and Gerald Gorman (Incorporated by reference to Exhibit 10.1 to EasyLink Services Corporation's Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2003) 10.3.3+ Domain Portfolio Purchase Agreement made the 23rd day of December, 2004, by and among Easylink Services Corporation; NJ Domains LLC; and Gerald Gorman (Incorporated by reference to Exhibit 10.1 to EasyLink Services Corporation's Current Report on Form 8-K filed December 28, 2004)+ 10.3.4 Guaranty of Domain Portfolio Purchase Agreement made and delivered the 23rd day of December, 2004, by Gerald Gorman in favor of EasyLink Services Corporation (Incorporated by reference to Exhibit 10.2 to EasyLink Services Corporation's Current Report on Form 8-K filed December 28, 2004) 10.3.5 Amendment No. 2 dated December 23, 2004 to Employment Agreement dated November 12, 2002 between EasyLink Services Corporation and Gerald Gorman (Incorporated by reference to Exhibit 10.3 to EasyLink Services Corporation's Current Report on Form 8-K filed December 28, 2004) 10.3.6 Severance Agreement made the 23rd day of December, 2004, by and between Gerald Gorman and Easylink Services Corporation (Incorporated by reference to Exhibit 10.4 to EasyLink Services Corporation's Current Report on Form 8-K filed December 28, 2004) 10.3.7 Release made and delivered the 23rd day of December, 2004 by Gerald Gorman in favor of EasyLink Services Corporation (Incorporated by reference to Exhibit 10.5 to EasyLink Services Corporation's Current Report on Form 8-K filed December 28, 2004) 10.3.8 Release made and delivered the 23rd day of December, 2004 by EasyLink Services Corporation in favor of Gerald Gorman (Incorporated by reference to Exhibit 10.6 to EasyLink Services Corporation's Current Report on Form 8-K filed December 28, 2004) 10.4 10.4.1 Employment Agreement dated February 23, 2001 between Mail.com and George Abi Zeid. (Incorporated by reference to Exhibit 10.1 of Mail.com, Inc.'s Current Report on Form 8-K filed March 9, 2001) 10.4.2 Amendment dated June 1, 2003 to Employment Agreement between EasyLink Services Corporation and George Abi Zeid (Incorporated by reference to Exhibit 10.4 to EasyLink Services Corporation's Annual Report on Form 10-K filed March 30, 2004) 10.4.3 Separation Agreement between EasyLink Services Corporation and George Abi Zeid dated January 28, 2005 (Incorporated by reference to Exhibit 10.6 to EasyLink Services Corporation's Current Report on Form 8-K filed January 28, 2005) 10.4.4 Reaffirmation Agreement made as of July 23, 2004, by and among EasyLink Services Corporation (f/k/a Mail.com, Inc.), a Delaware corporation, Swift Telecommunications, Inc., a Delaware corporation, and George Abi Zeid (Incorporated by reference to Exhibit 10.1 to EasyLink Services Corporation's Quarterly Report on Form 10-Q filed August 16, 2004) 10.5 Employment Agreement between EasyLink Services Corporation and Michael A. Doyle dated March 22, 2004 (Incorporated by reference to Exhibit 10.5 to EasyLink Services Corporation's Annual Report on Form 10-K filed March 30, 2004) 10.6 10.6.1 Employment Agreement between Mail.com, Inc. and Debra McClister dated April 1, 1999 (Incorporated by reference to Exhibit 10.4 to the IPO Registration Statement) 10.6.2 Letter Agreement between EasyLink Services Corporation and Debra McClister dated March 30, 2005 (Incorporated by reference to Exhibit 10.2 of EasyLink Services Corporation's Current Report on Form 8-K filed April 5, 2005) 10.7 Employment Agreement between Mail.com, Inc. and David Ambrosia dated May 19, 1999 (Incorporated by reference to Exhibit 10.6 to the IPO Registration Statement) 10.8 2004 Executive Incentive Plan - Level 1 (applicable to Chief Executive Officer) (Incorporated by reference to Exhibit 10.8 to EasyLink Services Corporation's Annual Report on Form 10-K filed March 30, 2004) 10.9 2004 Executive Incentive Plan - Level 1 International (applicable to President - International Operations) (Incorporated by reference to Exhibit 10.9 to EasyLink Services Corporation's Annual Report on Form 10-K filed March 30, 2004) 10.10 2004 Executive Incentive Plan - Level 2 (applicable to other named executive officers) (Incorporated by reference to Exhibit 10.10 to EasyLink Services Corporation's Annual Report on Form 10-K filed March 30, 2004) 10.11 2004 Executive Incentive Plan - Vice President of Sales (Incorporated by reference to Exhibit 10.11 to EasyLink Services Corporation's Annual Report on Form 10-K filed March 30, 2004) 74 10.12 Stock Option Agreement between Mail.com, Inc. and Gerald Gorman dated December 31, 1996. (Incorporated by reference to Exhibit 10.11 to the IPO Registration Statement) 10.13 Stock Option Agreement between Mail.com, Inc. and Gerald Gorman dated June 1, 1996. (Incorporated by reference to Exhibit 10.12 to the IPO Registration Statement) 10.14 1996 Employee Stock Option Plan (Incorporated by reference to Exhibit 10.14 to the IPO Registration Statement) 10.15 1997 Employee Stock Option Plan. (Incorporated by reference to Exhibit 10.15 to the IPO Registration Statement) 10.16 1998 Employee Stock Option Plan. (Incorporated by reference to Exhibit 10.16 to the IPO Registration Statement) 10.17 1999 Employee Stock Option Plan. (Incorporated by reference to Exhibit 10.17 to the IPO Registration Statement) 10.18 Mail.com, Inc. Supplemental 1999 Stock Option Plan. (Incorporated by reference to Exhibit 10.2 of Mail.com, Inc.'s Registration Statement on Form S-8 filed June 19, 2000) 10.19 Mail.com, Inc. Allegro Group Stock Option Plan. (Incorporated by reference to Exhibit 10.iii(A)(1) of Mail.com, Inc.'s Quarterly Report on Form 10-Q for the quarterly period ended September 30, 1999) 10.20 Mail.com, Inc. TCOM Stock Option Plan. (Incorporated by reference to Exhibit 10.iii(A)(2) of Mail.com, Inc.'s Quarterly Report on Form 10-Q for the quarterly period ended September 30, 1999) 10.21 Mail.com, Inc. 2000 Stock Option Plan. (Incorporated by reference to Exhibit 10.1 of Mail.com, Inc.'s Registration Statement on Form S-8 filed June 19, 2000) 10.22 Mail.com, Inc. Supplemental 2000 Stock Option Plan. (Incorporated by reference to Exhibit 10.3 of Mail.com, Inc.'s Registration Statement on Form S-8 filed June 19, 2000) 10.23 EasyLink Services Corporation 2001 Stock Option Plan. (Incorporated by reference to Appendix B to Definitive Proxy Statement of EasyLink Services Corporation filed on April 27, 2001) 10.24 EasyLink Services Corporation 2002 Stock Option Plan. (Incorporated by reference to Appendix A to Definitive Proxy Statement of EasyLink Services Corporation's filed on April 23, 2002) 10.25 EasyLink Services Corporation 2003 Stock Option Plan. (Incorporated by reference to Appendix A to Definitive Proxy Statement of EasyLink Services Corporation's filed on July 1, 2003) 10.26 1990 Stock Option Plan (Incorporated by reference to Exhibit 10.3 to NetMoves Corporation's Registration Statement on Form S-1, Registration No. 333-09613 ("NetMoves Registration Statement")) 10.27 1996 Stock Option/Stock Issuance Plan (Incorporated by reference to Exhibit 10.4 to the NetMoves Registration Statement) 10.28 Description of Stock Option Issued to Thomas Murawski (Incorporated by reference to Form of Notice To Record Shareholders of Mail.com, Inc. contained in Exhibit 99.1 of Mail.com, Inc.'s Current Report on Form 8-K filed January 17, 2001) 10.29 Form of Indemnification Agreement for Directors and Officers (Incorporated by reference to Exhibit 10.1 of the Company's Quarterly Report on Form 10-Q filed May 15, 2003) 10.30 10.30.1 Form of Stock Option Agreement for options granted under the Company's stock option plans (version providing 6 month period to exercise following termination for reasons other than cause or performance) 10.30.2 Form of Stock Option Agreement for options granted under the Company's stock option plans (version providing 12 month period to exercise following termination for reasons other than cause or performance) 10.30.3 Form of Stock Option Agreement for options granted under the Company's stock option plans (version providing 18 month period to exercise following termination for reasons other than cause or performance) 10.30.4 Form of Stock Option Agreement for options granted under the Company's stock option plans (version providing 24 month period to exercise following termination for reasons other than cause or performance) 10.30.5 Form of Stock Option Agreement for options granted under the Company's stock option plans (version providing 60 day period to exercise following termination for reasons other than cause or performance) 75 10.31 Lease Agreement between EasyLink Services Corporation and BT Piscataway, LLC dated July 23, 2003 relating to leased premises at the Company's headquarters located at 33 Knightsbridge Road, Piscataway, New Jersey (Incorporated by reference to Exhibit 10.33 to EasyLink Services Corporation's Annual Report on Form 10-K filed March 30, 2004) 10.32 Designation Letter dated January 8, 2001 from Mail.com, Inc. to Federal Partners, L.P. (Incorporated by reference to Exhibit 99.4 of Mail.com, Inc.'s Current Report on Form 8-K filed January 10, 2001) 10.33 10.33.1+ Credit Agreement by and among EasyLink Services Corporation, EasyLink Services USA, Inc., Swift Telecommunications, Inc., EasyLink Services International, Inc. and Wells Fargo Foothill, Inc. dated as of December 9, 2004+(Incorporated by reference to Exhibit 10.1 to EasyLink Services Corporation's Current Report on Form 8-K filed December 20, 2004) 10.33.2 First Amendment to Credit Agreement entered into as of March 30, 2005 by and among Wells Fargo Foothill, Inc., EasyLink Services Corporation, Swift Telecommunications, Inc., EasyLink Services USA, Inc., EasyLink Services International, Inc. (Incorporated by reference to Exhibit 10.1 of EasyLink Services Corporation's Current Report on Form 8-K filed April 5, 2005) 10.33.3 Security Agreement dated as of December 9, 2004 by EasyLink Services Corporation in favor of Wells Fargo Foothill, Inc. (Incorporated by reference to Exhibit 10.2 to EasyLink Services Corporation's Current Report on Form 8-K filed December 20, 2004) 10.33.4 Security Agreement dated as of December 9, 2004 by EasyLink Services USA, Inc. in favor of Wells Fargo Foothill, Inc. (Incorporated by reference to Exhibit 10.3 to EasyLink Services Corporation's Current Report on Form 8-K filed December 20, 2004) 10.33.5 Security Agreement dated as of December 9, 2004 by Swift Telecommunications, Inc. in favor of Wells Fargo Foothill, Inc. (Incorporated by reference to Exhibit 10.4 to EasyLink Services Corporation's Current Report on Form 8-K filed December 20, 2004) 10.33.6 Security Agreement dated as of December 9, 2004 by EasyLink Services International, Inc. in favor of Wells Fargo Foothill, Inc. (Incorporated by reference to Exhibit 10.5 to EasyLink Services Corporation's Current Report on Form 8-K filed December 20, 2004) 10.33.7+ Pledge Agreement, dated as of December 9, 2004, made by Easylink Services Corporation in favor of Wells Fargo Foothill, Inc.+ (Incorporated by reference to Exhibit 10.6 to EasyLink Services Corporation's Current Report on Form 8-K filed December 20, 2004) 10.33.8+ Pledge Agreement, dated as of December 9, 2004, made by Easylink Services USA, Inc. in favor of Wells Fargo Foothill, Inc.+ (Incorporated by reference to Exhibit 10.7 to EasyLink Services Corporation's Current Report on Form 8-K filed December 20, 2004) 10.33.9* Pledge Agreement, dated as of December 9, 2004, made by Swift Telecommunications, Inc. in favor of Wells Fargo Foothill, Inc.+ (Incorporated by reference to Exhibit 10.8 to EasyLink Services Corporation's Current Report on Form 8-K filed December 20, 2004) 10.33.10+Intellectual Property Security Agreement, dated as of December 9, 2004, made by Easylink Services Corporation in favor of Wells Fargo Foothill, Inc.+(Incorporated by reference to Exhibit 10.9 to EasyLink Services Corporation's Current Report on Form 8-K filed December 20, 2004) 10.33.11+Intellectual Property Security Agreement, dated as of December 9, 2004, made by Easylink Services USA, Inc. in favor of Wells Fargo Foothill, Inc.+(Incorporated by reference to Exhibit 10.10 to EasyLink Services Corporation's Current Report on Form 8-K filed December 20, 2004) 10.46 Common Stock Purchase Agreement dated as of March 13, 2001, by and between Mail.com, Inc., and the purchaser listed therein. (Incorporated by reference to Exhibit 99.3 of Mail.com, Inc.'s Current Report on Form 8-K filed March 26, 2001) 10.47 Registration Rights Agreement dated as of March 13, 2001, by and between Mail.com, Inc. and the investor listed therein. (Incorporated by reference to Exhibit 99.4 of Mail.com, Inc.'s Current Report on Form 8-K filed March 26, 2001) 10.48 10.48.1 Amended and Restated Master Carrier Agreement between EasyLink Services Corporation and AT&T Corp. dated September 30, 2003 (including General Terms & Conditions) ("MCA") (Incorporated by reference to Exhibit 10.48.1 to EasyLink Services Corporation's Annual Report on Form 10-K filed March 30, 2004) 10.48.2 MCA Supplemental Terms & Conditions (incorporated by reference to MCA Supplemental Terms & Conditions attached to Master Carrier Agreement contained in Exhibit 2.3 to Current Reporton Form 8-K of EasyLink Services Corporation filed on March 9, 2001) 10.48.3* AT&T Network Connection Service Terms and Pricing Attachments (incorporated by reference to MCA Supplemental Terms & Conditions attached to Master Carrier Agreement contained in Exhibit 2.3 to Current Report on Form 8-K of EasyLink Services Corporation filed on March 9, 2001) 76 10.48.4* AT&T MEGACOM Service & AT&T MEGACOM 800 Service Terms and Pricing Attachment (Incorporated by reference to Exhibit 10.48.4 to EasyLink Services Corporation's Annual Report on Form 10-K filed March 30, 2004) 10.48.5* AT&T Managed Internet Service Terms and Pricing Attachment (Incorporated by reference to Exhibit 10.48.5 to EasyLink Services Corporation's Annual Report on Form 10-K filed March 30, 2004) 10.48.6* AT&T Private Line and Satellite Service Terms and Pricing Attachment (Incorporated by reference to Exhibit 10.48.6 to EasyLink Services Corporation's Annual Report on Form 10-K filed March 30, 2004) 10.48.7* AT&T Uniplan Service Terms and Pricing Attachment (Incorporated by reference to Exhibit 10.48.7 to EasyLink Services Corporation's Annual Report on Form 10-K filed March 30, 2004) 10.48.8* AT&T Asynchronous Transfer Mode Service - Service Order Attachment (Incorporated by reference to Exhibit 10.2 to EasyLink Services Corporation Form 10-Q filed on May 14, 2004) 10.48.9* AT&T Data Service Terms and Pricing Attachment (Incorporated by reference to Exhibit 10.3 to EasyLink Services Corporation Form 10-Q filed on May 14, 2004) 10.49 Warrant dated November 27, 2001 issued to GATX Financial Corporation to purchase 251,000 shares of Class A common stock at an exercise price of $6.10 per share (after giving effect to January 2002 reverse stock split) (Incorporated by reference to Exhibit 10.49 to EasyLink Services Corporation's Annual Report on Form 10-K filed March 30, 2004) 10.50 Warrant dated November 27, 2001 issued to GATX Financial Corporation to purchase 11,500 shares of Class A common stock at an exercise price of $6.10 per share (after giving effect to January 2002 reverse stock split) (Incorporated by reference to Exhibit 10.50 to EasyLink Services Corporation's Annual Report on Form 10-K filed March 30, 2004) 10.51 Warrant dated November 27, 2001 issued to CitiCapital Commercial Leasing Corporation to purchase 48,611 shares of Class A common stock at an exercise price of $6.10 per share (after giving effect to January 2002 reverse stock split) (Incorporated by reference to Exhibit 10.51 to EasyLink Services Corporation's Annual Report on Form 10-K filed March 30, 2004) 10.52 Warrant dated November 27, 2001 issued to Forsythe/McArthur Associates, Inc. to purchase 64,351 shares of Class A common stock at an exercise price of $6.10 per share (after giving effect to January 2002 reverse stock split) (Incorporated by reference to Exhibit 10.52 to EasyLink Services Corporation's Annual Report on Form 10-K filed March 30, 2004) 10.53 Warrant dated November 27, 2001 issued to Pentech Financial Services, Inc. to purchase 51,860 shares of Class A common stock at an exercise price of $6.10 per share (after giving effect to January 2002 reverse stock split) (Incorporated by reference to Exhibit 10.53 to EasyLink Services Corporation's Annual Report on Form 10-K filed March 30, 2004) 10.54 Warrant dated November 27, 2001 issued to Phoenix Leasing Incorporated to purchase 34,289 shares of Class A common stock at an exercise price of $6.10 per share (after giving effect to January 2002 reverse stock split) (Incorporated by reference to Exhibit 10.54 to EasyLink Services Corporation's Annual Report on Form 10-K filed March 30, 2004) 10.55 Warrant dated November 27, 2001 issued to George Abi Zeid to purchase 268,297 shares of Class A common stock at an exercise price of $6.10 per share (after giving effect to January 2002 reverse stock split) (Incorporated by reference to Exhibit 10.55 to EasyLink Services Corporation's Annual Report on Form 10-K filed March 30, 2004) 10.56 Warrant dated November 27, 2001 issued to Fleet Business Credit, LLC to purchase 66,3172 shares of Class A common stock at an exercise price of $6.10 per share (after giving effect to January 2002 reverse stock split) (Incorporated by reference to Exhibit 10.56 to EasyLink Services Corporation's Annual Report on Form 10-K filed March 30, 2004) 21 Subsidiaries of EasyLink Services Corporation 23 Consent of KPMG LLP 31.1 Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 31.2 Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 32.1 Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 32.2 Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. * Confidential treatment granted. + Disclosure schedules and other attachments are omitted, but will be furnished supplementally to the Commission upon request. 77