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, 2005
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
incorporation or organization) Identification No.)
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 Capital Market
Indicate by check if the registrant is a well-known seasoned issuer, as defined
in Rule 405 of the Securities Act. [ ] Yes [X] No
Indicate by check if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act. [ ] Yes [X] No
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 a large accelerated filer, an
accelerated filer or a non-accelerated filer.
Large accelerated filer [ ] Accelerated filer [ ] Non-accelerated filer [X]
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Act). [ ] Yes [X] No
The aggregate market value of the voting stock held by non-affiliates of the
registrant as of June 30, 2005 was $38,375,000. 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, 2006: Class A common stock, 45,311,915 shares.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for the 2006 Annual Meeting of Shareholders are
incorporated by reference into Part III of this Form 10-K.
FORM 10-K INDEX
Page
Item No. No.
-------- ----
Part I
1. Business.................................................................... 3
1A. Risk Factors................................................................ 8
1B. Unresolved Staff Comments................................................... 17
2. Properties.................................................................. 17
3. Legal Proceedings........................................................... 17
4. Submission of Matters to a Vote of Security Holders......................... 18
Part II
5. Market for Registrant's Common Equity, Related Stockholder Matters
and Issuers Purchases of Equity Securities.................................. 18
6. Consolidated Selected Financial Data........................................ 21
7. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................................... 24
7A. Quantitative and Qualitative Disclosures About Market Risk.................. 32
8. Consolidated Financial Statements and Supplementary Data.................... 33
9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure........................................................ 66
9A. Controls and Procedures..................................................... 66
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.................................. 67
(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 .................................................................... 67
Signatures........................................................................ 75
Exhibit Index..................................................................... 76
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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 2005, approximately 69% of EasyLink's revenue
was attributable to our United States business and 31% 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, Canada, France, Germany,
Hong Kong, Israel, India, Japan, Korea, Malaysia, Singapore, United Arab
Emirates 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 23
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.
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:
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- 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, proprietary systems
designed and owned by our customers, 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, and IBM
proprietary;
- 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.
- provide the means for customers to sort, route, review, approve and
store documents electronically within their organization, rather than
using paper and manual methods
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.
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.
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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 Workflow Service provides the
capabilities of moving, storing, and
retrieving images and documents
electronically within a workgroup.
Typically, this hosted service will
receive documents from another EasyLink
service such as Fax to Email and provide
a digital workflow and/or document
repository for those documents as a
single, seamlessly integrated solution.
EasyLink's workflow solution
incorporating customer specific business
rules to support review and approve,
search and retrieve, or collaboration
processes.
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.
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 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
Our services generate revenue from per-message charges, per-page charges,
per-minute charges, per-character set charges, monthly per-user fees, license
fees and consulting fees. 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 monthly 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
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- retain, cross-sell and upsell our existing customer base;
- grow our new customer and distribution base; and
- build our brand.
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.
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 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 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.
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 MQ, 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.
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. 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 June 30, 2006, and AT&T has informed us that they do not wish to
extend the agreement beyond this date. As a result, we have built out a new
network center at our corporate headquarters located in Piscataway, New Jersey
and have commenced the migration of these operations to this center. If we are
unable to complete the migration of all of these operations and affected
customers by June 30, 2006, we will seek to enter into alternative arrangements
with AT&T to accommodate any remaining operations. Effective February 1, 2003,
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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
On July 21, 2005, Company entered into a new Master Carrier Agreement (MCA) with
AT&T Corp. ("AT&T") for the purchase of switched services, private lines, frame
relay service, asynchronous transport mode service and Internet service. Under
the MCA, the Company has a minimum purchase commitment in the aggregate for all
of the above services of $5 million over the 2-year term of the agreement. If
the Company terminates the MCA prior to the end of the 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 the remaining portion of the term. In connection with the MCA, the Company
and AT&T also entered into an amendment to the Intellectual Property Agreement
relating to intellectual property rights acquired from AT&T when the Company
acquired the EasyLink Services business from AT&T in 2001. Under the amendment,
the Company will have until June 30, 2006 to make changes to the systems
acquired in the 2001 purchase of the EasyLink Services business to eliminate all
use of the letters "att" in the e-mail addresses of users of EasyLink services.
We have also committed to purchase from Verizon Business (formerly 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, and Sterling Commerce, Inc., a
subsidiary of AT&T Corp. Our competitors in the integrated desktop messaging and
production messaging markets include Premier Global Services' 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.
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.
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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.
ITEM 1A
RISK FACTORS THAT MAY AFFECT FUTURE RESULTS
WE HAVE INCURRED LOSSES FROM OPERATIONS IN PRIOR YEARS.
We incurred a net loss of $1.1 million and a loss from operations of $2.0
million in 2005. We achieved income from operations for a full fiscal year for
the first time in 2004. 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. As a result, we had
an accumulated deficit of $541.7 million as of December 31, 2005.
We have experienced declining revenues in each of the years ended December 31,
2005, 2004 and 2003 as compared to the prior year. See Part II, Item 7:
Management's Discussion and Analysis of Financial Condition and Results of
Operations of this Annual Report on Form 10-K and subsequent filings with the
SEC. If we do not succeed in maintaining or increasing our revenues, our losses
may continue.
IF WE ARE UNABLE TO RAISE CAPITAL BY MAY 1, 2006 OR IF OUR REVENUES DECLINE AND
WE ARE UNABLE TO GENERATE SUFFICIENT CASH FLOW, WE MAY BE UNABLE TO PAY DEBT
SERVICE ON OUR INDEBTEDNESS OR COMPLY WITH APPLICABLE COVENANTS.
As of March 31, 2006, we had outstanding indebtedness under our credit facility
of $9.0 million payable over the next 30 months; obligations under office space
leases; and commitments for telecommunications services. We currently have $5.4
million in principal payments and additional amounts in interest payments due
during the twelve month period after March 31, 2006. These obligations include
$3 million in principal payments due on May 1, 2006. Our credit facility with
Wells Fargo requires us to raise at least $4 million of debt or equity financing
by May 1, 2006 and to maintain minimum specified levels of EBITDA and prohibits
us from incurring capital expenditures in excess of specified amounts. The
credit agreement also requires that we maintain a minimum cash balance of $1.5
million in a specified account and at least $3.5 million of eligible accounts
receivable availability. See "Management's Discussion and Analysis - Liquidity
and Capital Resources" contained in this Annual Report on Form 10-K and
subsequent filings with the SEC.
The Company has received letters of intent for $4.3 million of a proposed $5.4
million common stock financing. The Company is pursuing this financing and
alternative financings to meet the May 1, 2006 obligations under its credit
agreement. No assurance can be given that we will be able to complete this
financing or an alternative financing. If we do not complete the required debt
or equity financing by May 1, 2006 and we are unable to negotiate an extension
or modification of our credit agreement, we will be unable to comply with the
obligation to repay $3 million and will be in default under our credit
agreement, which would permit our lender to accelerate the maturity of the
obligations. If our revenues decline and we are not able to correspondingly
reduce expenses, 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 credit agreement such as the EBITDA, minimum cash balance, eligible accounts
receivable availability or capital expenditures covenants, we would be in
8
default under these obligations, which would permit our lender to accelerate the
maturity of the obligations.
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.
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 minimized 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 did not 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.
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 contained in this Annual Report on
Form 10-K and subsequent filings with the SEC. At December 31, 2005, we had $6.3
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. 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.
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. On August 1, 2005, we acquired Quickstream Software, Inc. 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;
9
- 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.
The network for the portion of our 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 June
30, 2006, and AT&T has informed us that they will not extend the agreement
beyond this date. As a result, we have built a new network center at our
corporate headquarters located in Piscataway, New Jersey and have commenced the
migration of these operations to this center. If we are unable to complete the
migration of all of these operations and affected customers by June 30, 2006, we
will seek to enter into alternative arrangements with AT&T to accommodate any
remaining operations.
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 might 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:
- incurrence of other cash and non-cash accounting charges, including charges
resulting from acquisitions or dispositions of assets, including from
write-downs of impaired assets;
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- 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 first quarter
of 2006;
- 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.
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 Annual Report on Form
10-K and subsequent filings with the SEC.
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.
11
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.
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 a
major portion of 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 during 2006 of the network
equipment from the leased AT & T facility and our Glen Head, New York 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
12
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. Our
computers are vulnerable to computer viruses, physical or electronic break-ins,
denial of service attacks 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. Any deterioration in the performance of the Internet as a
whole could undermine the benefits of our services. We also depend on
telecommunications network suppliers such as AT&T Corporation, Verizon Business
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, and "Item 1. Business - Technology" contained
in our Annual Report on Form 10-K and subsequent filings with the SEC.
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;
- 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;
13
- 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.
With some exceptions, online activity is not currently subject to U.S. laws and
regulations that differ from those applicable to offline activities. Laws and
regulations have been enacted to regulate activity that occurs only on the
Internet (e.g., laws regulating the sending of unsolicited email advertisements,
electronic signatures, etc.), or to limit the applicability of existing laws and
regulations in the online environment (e.g., limiting copyright and tort
liability for user-provided content). In the future, however, additional laws
and regulations may be adopted at both the state and federal level to address
issues such as, for example, user privacy, data security, marketing, pricing,
and the characteristics and quality of products and services in the online
context specifically.
We believe that our services are "information services" under the
Telecommunications Act of 1996 and existing precedent and therefore would not
currently be subject to traditional U.S. telecommunication services regulation.
However, while the Federal Communications Commission ("FCC") historically has
refrained from extensive regulation of entities that provide service using the
Internet or Internet protocol ("IP"), it has recently begun to impose at least
some regulatory paradigms on such services as they increasingly are used as
substitutes for traditional communications services. For example, the FCC
already has required certain providers of voice over Internet Protocol ("VoIP")
telephony to provide enhanced 911 capability to their customers and to
accommodate requests by law enforcement to permit electronic surveillance. If
upheld in pending appeals, these requirements are likely to create additional
costs. In addition, the FCC is currently considering whether to impose certain
obligations on providers of Internet-based and IP-based services generally,
including but not limited to VoIP. Such potential rules could include
requirements to ensure access for disabled persons, 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. The FCC is also examining whether and how to
differentiate among Internet-based and IP-based services to determine which
services should be subject to particular regulatory obligations. It cannot be
predicted whether such rules will be adopted and, if so, whether they would be
applied to our non-voice services.
Moreover, although the FCC has indicated that it views certain Internet-based
services as being interstate and thus 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.
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.
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.
As noted above, the FCC is considering whether providers of information services
should be required to contribute to the universal service fund, which was
established to subsidize telecommunications service in rural areas in the United
States but to which only providers of telecommunications services are currently
required to contribute; states may pursue similar inquiries with respect to
their own funds. Apart from that issue, federal and state regulations could
change in a manner that increases the contributions required by
telecommunications carriers, which would in turn increase our costs in
purchasing such telecommunications services. Providers are authorized to pass
their 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.
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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 Peoples Republic of China, 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. The
United States Patent and Trademark Office has filed an office action rejecting
the claims in a patent application that we filed. Although we may continue to
pursue this patent application in its current or a modified form, 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.
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
our Annual Report on Form 10-K and subsequent filings with the SEC. These
proceedings include a broker's fee dispute in which the Company successfully
appealed a $931,000 judgment imposed on it and which is currently on remand to
the United States District Court. Although the Company intends to pursue its
defense of these matters vigorously, no assurance can be given that the
15
Company's efforts will be successful. To the extent that the Company is not
successful in the remand proceeding, it may be required to pay any judgment that
may be rendered in such proceeding. 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, 2006, we had an aggregate of 45,311,915, shares of Class A common
stock outstanding. As of December 31, 2005, we had options to purchase 5,152,135
shares of Class A common stock outstanding and warrants to purchase 798,523
shares of Class A common stock outstanding.
As of March 31, 2006, 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.
OUR CLASS A COMMON STOCK MAY BE SUBJECT TO DELISTING FROM THE NASDAQ CAPITAL
MARKET.
Our Class A common stock faces potential delisting from the Nasdaq Capital
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 Capital
Market. These standards require, among other things, that our Class A common
stock have a minimum bid price of $1. In addition, the listing standards require
that we comply with our SEC periodic reporting requirements and that we maintain
compliance with various other standards.
On August 23, 2005, the Company received notice from The NASDAQ Stock Market,
Inc. Listing Qualifications Staff that for 30 consecutive trading days the bid
price of its common stock closed below the minimum $1.00 per share required for
continued inclusion under Nasdaq Marketplace Rule 4450(a)(5) (the "Minimum Bid
Price Rule"). The August 23, 2005 letter from Nasdaq indicates that, in
accordance with Nasdaq Marketplace Rule 4450(e)(2), the Company has until
February 21, 2006 (180 calendar days from the date of the letter) to regain
compliance with the Minimum Bid Price Rule. Because the Company was unable to
regain compliance with the Minimum Bid Price Rule by the expiration of the
original 180 day grace period, or February 21, 2006, the Company applied to
transfer the listing of its common stock from the NASDAQ National Market to the
NASDAQ Capital Market. The Staff of NASDAQ notified EasyLink that its
application to transfer its listing to the NASDAQ Capital Market was approved on
February 16, 2006. On February 22, 2006, EasyLink received notice from NASDAQ
that it had determined that EasyLink was entitled to the additional 180 day
grace period to regain compliance with NASDAQ's $1 minimum bid price
requirement. As a result of the determination, EasyLink will have until August
21, 2006 to comply with the $1.00 minimum closing bid price requirement on the
Nasdaq Capital Market. The Company may regain compliance with the minimum bid
price rule if, at any time before August 21, 2006, the bid price of its common
stock closes at $1.00 per share or more for a minimum of ten consecutive trading
days. The NASDAQ staff may, in its discretion, require the Company to maintain a
bid price of at least $1.00 per share for a period in excess of ten consecutive
business days (but generally no more than 20 consecutive business days) before
determining that the Company has demonstrated the ability to maintain long-term
compliance.
No assurance can be given that the Company will be able to regain compliance
with the Minimum Bid Price Rule by August 21, 2006.
If the Company is unable regain compliance with the $1 minimum bid price
requirement, its securities will be subject to delisting from the Nasdaq
National Market.
If our common stock were to be delisted from trading on the Capital Market and
were neither re-listed thereon nor listed for trading on another 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
16
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.
WE MAY BE EXPOSED TO POTENTIAL RISKS RELATING TO OUR INTERNAL CONTROLS OVER
FINANCIAL REPORTING AND OUR ABILITY TO HAVE THOSE CONTROLS ATTESTED TO BY OUR
INDEPENDENT AUDITORS.
As directed by Section 404 of the Sarbanes-Oxley Act of 2002 ("SOX 404"), the
Securities and Exchange Commission adopted rules requiring public companies to
include a report of management on the company's internal controls over financial
reporting in their annual reports, including Form 10-KSB. In addition, the
independent registered public accounting firm auditing a company's financial
statements must also attest to and report on management's assessment of the
effectiveness of the company's internal controls over financial reporting as
well as the operating effectiveness of the company's internal controls. We were
not subject to these requirements for the year ended December 31, 2005 or 2004.
We have commenced the process of planning for the implementation of Section 404
reporting.
While we expect to expend significant resources in developing the necessary
documentation and testing procedures required by SOX 404, there is a risk that
we will not comply with all of the requirements imposed thereby. We can not
assure you that we will receive a positive attestation from our independent
auditors. In the event we identify significant deficiencies or material
weaknesses in our internal controls that we cannot remediate in a timely manner
or we are unable to receive a positive attestation from our independent auditors
with respect to our internal controls, investors and others may lose confidence
in the reliability of our financial statements, our stock price may decline and
our ability to obtain equity or debt financing could suffer.
ITEM 1B UNRESOLVED STAFF COMMENTS
Not applicable.
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 9,000 square feet still
remaining under leases expiring in 2006. In addition, we have office,
development lab and network space at three other locations throughout the United
States under leases expiring in 2006 through 2010; two U.S. network
installations co-located in telehousing facilities under short-term leases; and
sales offices in New York City, Chicago, San Francisco and Los Angeles under
leases expiring in 2006 and 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 June 30, 2006.
While we believe that these facilities meet our anticipated needs at least
through the end of 2006, 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 office located in London is the headquarters location for the
international division where the lease expires in June 2017, with cancellation
allowable, 10 years prior to expiration in 2007. The lease for the second
facility expires in 2008.
We lease approximately 15,000 square feet of office space in locations in
Brazil, France, Germany, Hong Kong, India, Singapore, South Korea and United
Arab Emirates. 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
17
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 and the broker appealed the
decision of the District Court to the United States Court of Appeals for the
Second Circuit. On June 20, 2005, the Court of Appeals reversed the District
Court's ruling that the broker was a third party beneficiary of the terminated
agreement and set aside the $931,000 of damages awarded against the Company by
the District Court. The Court of Appeals also rejected the broker's claim on
appeal for additional damages. The Court of Appeals, however, also determined
that the District Court had not fully resolved the issue of whether the Company
had breached the agreement to sell the portal operations for the express purpose
of avoiding the broker's commission. Accordingly, the Court of Appeals remanded
the case to the District Court for further consideration. The broker
subsequently filed a petition for rehearing with the Court of Appeals. On July
20, 2005, the Court of Appeals denied the broker's petition. Briefs and reply
briefs were submitted to the District Court on or before January 27, 2006, and
the parties are awaiting the decision of the District Court on the remand issue.
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.
On November 14, 2005, a former Turkish-based reseller of the Company named
Arisegroup and its principals filed what purported to be a derivative complaint
on behalf of a recently formed Turkish entity against the Company, certain of
the Company's current and former directors and officers and Swift Comtext
Limited, a UK subsidiary of the Company, in the Supreme Court of the State of
New York, County of New York. The complaint alleges breach of contract, tortious
interference with contract, unjust enrichment, conversion, misappropriation of
corporate opportunity, breach of fiduciary duties and fraud in the inducement
and makes a claim for an accounting. The complaint seeks relief in the form of,
among other relief, compensatory damages "in an amount in excess of $5,000,000",
punitive damages "in an amount in excess of $10,000,000," pre-judgment interest
and costs. The complaint arises out of the termination of a reseller/sponsorship
arrangement between Arise and the Company and alleges the defendants agreed to
establish and operate a corporation to conduct and expand EasyLink's business in
Turkey and that "plaintiffs" would own 50% of the corporation. As of the date of
filing of this report, the Company and, to the Company's knowledge, the other
defendants have not yet been served. The Company believes that the allegations
against the Company and the individual defendants are without merit. The Company
intends to defend the complaint vigorously and to pursue available remedies for
the filing this complaint.
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
2005
----------------------------------------------------------------
FOURTH QUARTER THIRD QUARTER SECOND QUARTER FIRST QUARTER
-------------- ------------- -------------- -------------
High................... $ 1.00 $ 1.03 $ 1.35 $ 1.46
Low.................... $ 0.62 $ 0.62 $ 0.83 $ 1.00
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
The Nasdaq closing market price at February 28, 2006 was $0.79.
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.
18
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, 2006, the approximate number of holders of record of Class A
common stock was 694, although there were many more beneficial owners.
STOCK LISTINGS
The principal market on which the common stock is traded is the NASDAQ Capital
Market under the symbol "EASY".
EQUITY COMPENSATION PLAN INFORMATION
The following table provides information as of December 31, 2005 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 4,561,597 $ 2.46 417,284
Equity compensation plans not approved
by security holders (1) 590,538 $ 10.77 -
--------- -------- -------
Total: 5,152,135 $ 3.42 417,284
(1) Includes options to purchase 47,102 shares of Class A common stock at a
weighted average exercise price of $13.95 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.
19
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, 2005
-----------------------------------------------------------------------------------------
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.................................. 1,045 $ 7.03 -
Lansoft Stock Option Plan............. 150 $ 16.88 -
Netmoves 2000 Stock Option Plan....... 44,310 $ 16.69 -
Netmoves 1996 Stock Option Plan....... 47,102 $ 13.95 -
Other Plans:
Mail.com 1999 Supplemental Stock
Option Plan........................... 72,368 $ 7.91 -
Mail.com 2000 Supplemental Stock
Option Plan........................... 94,585 $ 5.28 -
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
=======
20
RECENT SALES OF UNREGISTERED SECURITIES
During the three months ended December 31, 2005, EasyLink Services issued
127,716 shares of Class A common stock to the Company's 401(k) plan for
employees' accounts at a weighted average price of $0.79 per share representing
the Company's matching contribution to the plan 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.
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 each included
an explanatory paragraph in their audit report accompanying the 2005 and 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.
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 2001 through 2005, the period to period comparisons for 2001
through 2005 are not meaningful and should not be relied upon as indicative of
future performance.
21
Five Year Summary of Selected Financial Data (in thousands, except per share and
employee data)
2005 2004 2003 2002 2001
------------ ------------- ------------ ------------ ------------
Consolidated Statement of Operations Data for the
Year Ended December 31,
Revenues ........................................ $ 78,659 $ 91,840 $ 101,347 $ 114,354 $ 123,929
Total cost of revenues and operating expenses (a) 80,701 82,754 102,264 201,287 296,170
Income (loss) from operations ................... (2,042) 9,086 (917) (86,933) (172,241)
Total other income (expense), net (b) ........... 607 1,004 52,803 1,088 28,203
Income(loss) from continuing operations before
income taxes ................................. (1,435) 10,090 51,886 (85,845) (144,038)
Provision (credit) for income taxes ............. (350) 2,400 -- -- --
Income(loss) from continuing operations ......... (1,085) 7,690 51,886 (85,845) (144,038)
Loss from discontinued operations ............... -- -- (938) -- (63,027)
Extraordinary gain .............................. -- -- -- -- 782
Net income (loss) ............................... (1,085) 7,690 50,948 (85,845) (206,283)
Basic net income(loss) per common share:
Income(loss) from continuing operations ......... $ (0.02) $ 0.17 1.47 (5.13) (15.26)
Loss from discontinued operations ............... -- -- (0.03 -- (6.68)
Extraordinary gain .............................. -- -- -- -- 0.09
------------ ------------- ------------ ------------ ------------
Basic net income (loss) per common share ........ $ (0.02) $ 0.17 $ 1.44 $ (5.13) $ (21.85)
============ ============= ============ ============ ============
Diluted net income(loss) per common share:
Income(loss) from continuing operations ......... $ (0.02) $ 0.17 1.46 (5.13) (15.26)
Loss from discontinued operations................ -- -- (0.03) -- (6.68)
Extraordinary gain .............................. -- -- -- -- 0.09
------------ ------------- ------------ ------------ ------------
Diluted net income(loss) per common share ....... $ (0.02) $ 0.17 $ 1.43 $ (5.13) $ (21.85)
============ ============= ============ ============ ============
Weighted average basic shares outstanding ....... 44,687 44,004 35,402 16,733 9,442
Weighted average diluted shares outstanding ..... 44,687 44,891 35,654 16,733 9,442
Consolidated Balance Sheet Data at December 31,
Cash and cash equivalents ....................... 6,282 12,216 6,623 9,554 13,278
Total current assets ............................ 20,351 28,963 19,813 23,511 36,900
Property and equipment, net ..................... 10,252 8,071 10,641 14,833 21,956
Goodwill and other intangible assets, net ....... 12,477 14,862 17,895 20,814 107,937
Total assets .................................... 43,975 52,664 49,411 61,011 170,242
Total current liabilities ....................... 29,841 28,994 31,575 43,126 54,494
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
Total liabilities ............................... 31,594 39,694 44,999 122,833 149,733
Total stockholders' equity (deficit) ............ 12,381 12,970 4,412 (61,822) 20,509
Number of employees at December 31, ............. 396 469 483 572 587
(a) Included in operating expenses are:
2005 2004 2003 2002 2001
------------ ------------- ------------ ------------ ------------
Amortization of goodwill and other intangible
assets (1) ...................................... 2,337 2,284 2,919 6,751 52,068
Impairment of intangible assets ................. -- 750 -- 78,784 62,200
Restructuring charges (credits) ................. -- (350) 1,478 2,320 25,337
(Gain) loss on sale of businesses/Mailwatch
service line ................................. 250 (5,017) -- (426) 1,804
22
(b) Included in other income (expense), net are:
2005 2004 2003 2002 2001
------------ ------------- ------------ ------------ ------------
Interest income ................................. 136 247 36 189 565
Interest expense ................................ (1,420) (517) (1,390) (4,785) (10,383)
Gain on domain names repurchase agreement ....... 1,907
Gain on debt restructuring and settlements ...... -- 984 54,078 6,558 47,960
Impairment of investments ....................... -- -- -- (1,515) (10,131)
Other, net ...................................... (16) 290 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.
23
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.
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
offerred 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, 2005 total revenues were $78.7 million in
comparison to $91.8 million in 2004 and $101.3 million in 2003. As detailed in
the schedule below the declines in revenue in 2005 and 2004 as compared to the
prior years were attributable to (1) lower revenues in our Transaction Delivery
Services amounting to $14.8 million or 19% in 2005 as compared to 2004 and $11.3
million or 13% in 2004 as compared to 2003; and (2) $2.5 million and $2.2
million in lower MailWatch revenues in 2005 and 2004, respectively, 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
$4.1 million in 2005 representing 33% growth over 2004 and $4.0 million in 2004
representing 48% growth in comparison to 2003.
24
PERCENT CHANGE
---------------------------
2005 VS. 2004 VS.
2005 2004 2003 2004 2003
------------ ------------ ------------ ------------ ------------
Transaction Management Services ... $ 16,377 $ 12,304 $ 8,334 33% 48%
Transaction Delivery Services ..... 62,282 77,063 88,348 (19)% (13)%
MailWatch ......................... -- 2,473 4,665 -- (47)%
------------ ------------ ------------ ------------ ------------
$ 78,659 $ 91,840 $ 101,347 (14)% (9)%
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 2006. 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.
OPERATING RESULTS
In 2005 our operating results amounted to a loss of $2.0 million (including $2.3
million in costs related to the Separation Agreement with our former President
of the International division) in comparison to 2004 income from operations of
$9.1 million (including $5.0 million of gains on the sale of our MailWatch
service line and our domain assets). The revenue decline in 2005 resulted in a
$7.0 million lower gross margin and is the major factor in the unfavorable
change from year to year. In 2004, revenues also declined in comparison to the
prior year but reduced cost of service resulted in a $3.9 million improvement in
gross margin.
We heightened our efforts to increase revenues from Transaction Management
Services during the fourth quarter of 2004 and during 2005 by hiring additional
sales and marketing personnel and undertaking certain promotional programs. Our
continued spending in these sales and marketing efforts will mean that our
overall results for at least the first half of 2006 will be negatively impacted.
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
reporting depends. Critical principles were determined by considering accounting
policies that involve the most complex or subjective decisions or assessments.
The most critical
25
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
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 2004 and 2003, 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 April 2006.
26
RESULTS OF OPERATIONS - 2005, 2004 AND 2003
PERCENT CHANGE
-----------------------
2005 2004 VS.
2005 2004 2003 VS. 2004 2003
---------- ---------- ---------- ---------- ----------
Revenues .............................................. $ 78,659 $ 91,840 $ 101,347 (14.4)% (9.4)%
Cost of revenues ...................................... 29,929 36,129 49,553 (17.2)% (27.1)%
---------- ---------- ---------- ---------- ----------
Gross Margin .......................................... 48,730 55,711 51,794 (12.5)% 7.6%
% of Revenue .......................................... 62% 61% 51%
Operating expenses:
Sales and marketing ................................... 19,449 18,715 18,379 4.1% 1.8%
General and administrative ............................ 19,925 23,731 24,405 (14.6)% (2.8)%
Product development ................................... 6,798 6,730 6,383 0.1% 5.4%
Separation agreement costs ............................ 2,312 -- -- (a) (a)
Amortization of intangible assets ..................... 2,068 2,066 2,066 0.0% 0.0%
Impairment of intangible assets ....................... -- 750 -- (a) (a)
Restructuring charges (credits) ....................... -- (350) 1,478 (a) (a)
(Gain) on sale of businesses/MailWatch service line ... 250 (5,017) -- (a) (a)
---------- ---------- ----------
50,772 46,625 52,711 8.9% (11.6)%
---------- ---------- ----------
INCOME (LOSS) FROM OPERATIONS ......................... (2,042) 9,086 (917)
Other income (expense), net:
Gain on domain names repurchase agreement ............. 1,907 -- --
Gain on debt restructuring and settlements ............ -- 984 54,078
Interest income (expense), net ........................ (1,284) (270) (1,354)
Other ................................................. (16) 290 79
---------- ---------- ----------
607 1,004 52,803
INCOME (LOSS) FROM CONTINUING
OPERATIONS BEFORE INCOME TAXES ..................... (1,435) 10,090 51,886
Provision (credit) for income taxes ................... (350) 2,400 --
---------- ---------- ----------
INCOME (LOSS) FROM CONTINUING OPERATIONS .............. (1,085) 7,690 51,886
========== ========== ==========
(a) Represents one time charges (credits) that are not comparable from period
to period.
RESULTS OF OPERATIONS - 2005 AND 2004
REVENUES
Revenues in 2005 were $78.7 million as compared to $91.8 million in 2004. The
decrease of $13.1 million was due primarily to reduced revenues in our
Transaction Delivery services, as a result of lower volumes and negotiated
individual customer price reductions, the loss of certain customers, the sale of
our fax businesses in Singapore and Malaysia and $2.5 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 $4.1 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 2006.
COST OF REVENUES
Cost of revenues for 2005 decreased to $29.9 million from $36.1 million in 2004.
As a percentage of revenues these costs decreased to 38% in 2005 as compared to
39% in 2004. Cost of revenue reflects a decrease in costs as a
27
result of lower expenses in most of the cost components including lower
depreciation charges, savings from continuing cost reduction programs in network
operations, lower telecom rates, favorable dispute settlements including
$540,000 or 1% of revenues from the MCI settlement, reductions in telecom
facilities 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 for 2005 increased to $19.4 million from $18.7
million in 2004. The increased expense relates to our increased staff and
promotional program spending to expand Transaction Management services. We
expect these expenses to continue at the increased levels throughout 2006.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses were $19.9 million in 2005 as compared to
$23.7 million in 2004. The reduced costs occurred in most categories of this
expense with the most significant reduction in officer and employee salaries and
related tax and benefit expenses amounting to approximately $1.5 million. Cost
reductions were generally achieved through reductions in head count. While
certain cost components may vary, we anticipate general and administrative
expenses in total for 2006 to be comparable to 2005 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 $6.8 million for 2005 as compared to $6.7
million in 2004. We anticipate that spending for product development will
continue at the same levels in 2006 in connection with the development of the
new Transaction Management services and the continuing feature development of
other services.
AMORTIZATION AND IMPAIRMENT OF INTANGIBLE ASSETS
Amortization of intangible assets relates to intangible assets with finite
lives. The amortization is calculated on a straight line basis and, accordingly,
this expense was $2.1 million in both 2005 and 2004. Amortization expense on
assets with finite lives as of December 31, 2005 will decrease to $0.6 million
in 2006 as the estimated lives on certain of the assets will expire in that
year. In 2004 an impairment of the Company's trademark of $750,000 was recorded
based upon the annual assessment of all intangibles. The Company determined that
there was no impairment of intangible assets for 2005.
INTEREST INCOME (EXPENSE), NET
Interest income(expense), net for 2004 was $1.3 million of expense as compared
to $270,000 of expense during 2004. The increase was primarily due to interest
on the new Wells Fargo Term Loan obtained in December 2004. Interest on our
previously outstanding debt, paid off with the Wells Fargo loan proceeds, had
been capitalized in accordance with SFAS No. 15, "Accounting by Debtors and
Creditors for Troubled Debt Restructurings", and did not result in charges in
the statement of operations.
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 minimized 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 did not incur any
material current income tax liability from the elimination of this debt,
although the relevant tax authorities may challenge our income tax positions.
28
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.
COST OF REVENUES
Cost of revenues for 2004 decreased to $36.1 million from $49.6 million in 2003.
As a percentage of revenues these costs decreased to 39% 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 7%. Reduction in other costs include savings
from continuing cost reduction programs in network operations, lower telecom
rates, favorable settlement dispute, favorable adjustments of prior period cost
estimates, 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.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses were comparable as these costs amounted to
$23.7 million in 2004 as compared to $24.4 million in 2003.
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.
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
$750,000 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.
INTEREST INCOME (EXPENSE), NET
Interest income(expense), net for 2004 was $270,000 of expense as compared to
$1.4 million of expense during 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.
29
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.
LIQUIDITY AND CAPITAL RESOURCES
Our cash and cash equivalents balances decreased by $5.9 million in 2005 largely
caused by a decline in our cash from operations which amounted to only $291,000
in 2005 as compared to $5.7 million in 2004. Our working capital deficit also
worsened reaching $9.5 million as of December 31, 2005 as compared to $31,000 at
December 31, 2004. $7.2 million of this decrease in working capital was
attributable to the $3 million repayment obligation under the amendment to the
credit agreement and the reclassification as currently payable of the portion of
the term loan that is repayable after December 31, 2006. In addition, we spent
$4.6 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. In 2004 our capital
expenditures amounted to $2.6 million.
In 2004 we had significantly improved our financial condition by (1) reducing
operating costs through consolidation of certain 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 $12.2 million, a $5.7 million increase in comparison to
balances on hand at December 31, 2003.
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 $10.9 million of the proceeds from the term loan to
pay off all our secured debt and to pay off our subordinated debt at maturity 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 had
approximately $1 million of advances outstanding as of December 31, 2005.
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. 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 $2.5 million from the
calculation of EBITDA for covenant compliance purposes. Additionally, in
December 2005 Wells Fargo agreed to waive the EBIDTA covenant for the quarter
ended December 31, 2005 and granted the Company certain other limited waivers
pending further agreement on the financial covenants applicable to future
periods.
On February 27, 2006 the Company entered into an amendment to the Credit
Agreement establishing revised EBITDA covenants but eliminating our ability to
drawn down any future Advances and also requiring the Company to pay the
outstanding Advances balance of $950,000. The amendment also requires that we
maintain a minimum cash balance of $1.5 million in a specified account and at
least $3.5 million of eligible accounts receivable availability. The amendment
further requires the Company to obtain at least $4.0 million in new subordinated
debt or equity financing and to prepay $3.0 million of the Term Loan, both by
May 1, 2006. The Company repaid the $950,000 in Advances in February 2006. The
Company has received letters of intent for $4.3 million of a proposed $5.4
million common stock financing. The Company is pursuing this financing and
alternative financings to meet the May 1, 2006 obligations under its credit
agreement. If we do not complete the required debt or equity financing by May 1,
2006 and we are unable to negotiate an extension or modification of our credit
agreement, we will be unable to comply with the obligation to repay $3.0 million
and will be in default under our credit agreement, which would permit our lender
to accelerate the maturity of the obligations.
30
If we raise the required $4.0 million of financing and make the $3.0 million
repayment by May 1, 2006, we believe our current cash and cash equivalent
balances, cash from operations and proceeds of such financing will provide
adequate funds for operating and other planned expenditures and debt service for
at least the next twelve months.
For each of the years ended December 31, 2005, 2004 and 2003, we received a
report from our independent registered public accountants containing an
explanatory paragraph stating that we have a working capital deficiency and an
accumulated deficit among other factors that raise 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 we are
unable to raise the required financing required by our credit agreement or to
raise additional financing, restructure or settle additional outstanding debt or
to generate sufficient cash flow from operations, we may be unable to continue
as a going concern.
CONTRACTUAL OBLIGATIONS
Below is a table that presents our contractual obligations and commitments at
December 31, 2005:
PAYMENTS DUE BY PERIOD (IN THOUSANDS)
--------------------------------------------------------------
LESS THAN AFTER
TOTAL ONE YEAR 1-3 YEARS 4-5 YEARS 5 YEARS
---------- ---------- ---------- ----------- ----------
Long-term debt obligations .................. $ 10,550 $ 6,350 $ 4,200 $ -- --
Operating and capital lease obligations ..... 11,397 2,589 3,288 2,803 $ 2,717
Purchase obligations mostly consisting of
telecommunication contract commitments .... 6,277 4,275 1,798 204 --
Other long term liabilities ................. 1,229 557 672 -- --
---------- ---------- ---------- ----------- ----------
$ 29,453 $ 13,771 $ 9,958 $ 3,007 $ 2,717
========== ========== ========== =========== ==========
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 annual period
that begins after June 15, 2005. Accordingly, the Company will adopt SFAS 123(R)
in 2006 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. To minimize the expense to be recorded in
future periods, the Company accelerated the vesting of all current employee
options with an exercise price in excess of $0.92 per share in December, 2005.
Accordingly, we believe the adoption of this statement will not have a
significant impact on the Company's financial statements for 2006 based upon the
options outstanding as of December 31, 2005.The Company currently provides the
pro forma disclosures required by SFAS No. 148, "Accounting for Stock Based
Compensation - Transition and Disclosure".
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 does not anticipate that it will repatriate foreign earnings that have
not yet been remitted to the U.S. and,
31
accordingly, the adoption of this statement had no impact on the financial
statements of the Company as of December 31, 2005 and for the year then ended.
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 equivalents have original
maturities of three months or less. Changes in the market's interest rates do
not affect the value of these investments. In December, 2004 we entered into a
variable interest rate credit agreement with Wells Fargo that creates an
interest rate risk for the Company on the $12 million Term Loan as well as any
working capital advances drawn down on the facility. The impact of this risk
assuming the current amortization schedule, as amended in February, 2006, of the
outstanding Term Loan and a hypothetical shift of 1% in interest rates would be
an increase or decrease, as applicable, in interest costs of $63,000 for the
year ended December 31, 2006 related to the Term Loan. The Company has
considered the use of interest rate swaps and similar transactions to minimize
this risk but has not entered into any such arrangements to date. The Company
intends to continue to evaluate this risk and the cost and possible
implementation of such arrangements in the future.
32
ITEM 8 CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
EASYLINK SERVICES CORPORATION
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
Reports of Independent Registered Public Accountanting Firms........... 34
Consolidated Balance Sheets as of December 31, 2005 and
2004 ................................................................ 36
Consolidated Statements of Operations for the years ended
December 31, 2005, 2004 and 2003..................................... 37
Consolidated Statements of Stockholders' Equity (Deficit)
and Comprehensive Income (Loss) for the years ended
December 31, 2005, 2004 and 2003..................................... 38
Consolidated Statements of Cash Flows for the years ended
December 31, 2005, 2004 and 2003..................................... 40
Notes to Consolidated Financial Statements............................. 41
33
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders of
EasyLink Services Corporation:
We have audited the accompanying consolidated balance sheet of EasyLink Services
Corporation and subsidiaries as of December 31, 2005, and the related
consolidated statements of operations, stockholders' equity (deficit) and
comprehensive income (loss), and cash flows for the year then ended. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audit.
We conducted our audit in accordance with the 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. The Company is not
required to have, nor were we engaged to perform an audit of its internal
control over financial reporting. Our audit included consideration of internal
control over financial reporting as a basis for designing audit procedures that
are appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company's internal control over financial
reporting. Accordingly, we expresss no such opinion. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of EasyLink Services
Corporation and subsidiaries as of December 31, 2005, and the results of their
operations and their cash flows for the year then ended, in conformity with
accounting principles generally accepted in the United States of America.
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 history of operating
losses and at December 31, 2005, had an accumulated deficit of approximately
$542.0 million and a working capital deficit of approximately $9.5 million.
These factors, among others, as discussed in Note 1(B), raise substantial doubt
about the Company's ability to continue as a going concern. Management's plans
in regard to these matters are also described in Note 1(B). The financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.
/s/Grant Thornton LLP
--------------------------------
Edison, New Jersey
March 31, 2006
34
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors
EasyLink Services Corporation:
We have audited the accompanying consolidated balance sheet of EasyLink Services
Corporation and subsidiaries as of December 31, 2004, and the related
consolidated statements of operations, stockholders' equity (deficit) and
comprehensive income (loss), and cash flows for each of the years in the
two-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 the results of their
operations and their cash flows for each of the years in the two-year period
ended December 31, 2004 in conformity with U.S. generally accepted accounting
principles.
As discussed in Note 2, the consolidated financial statements as of December 31,
2004 and for the year then ended have been restated.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. The Company has a working
capital deficiency and an accumulated deficit that raise substantial doubt about
its ability to continue as a going concern. 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, except as to Note 2,
which is as of December 5, 2005.
35
EASYLINK SERVICES CORPORATION
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share data)
DECEMBER 31,
-----------------------
2005 2004
---------- ----------
ASSETS
Current assets:
Cash and cash equivalents ............................................................. $ 6,282 $ 12,216
Marketable securities ................................................................. -- 2,023
Accounts receivable, net of allowance for doubtful accounts of $2,330 and
$3,950 as of December 31, 2005 and 2004, respectively ............................... 11,416 11,883
Prepaid expenses and other current assets ............................................. 2,653 2,841
---------- ----------
Total current assets .................................................................. 20,351 28,963
---------- ----------
Property and equipment, net ........................................................... 10,252 8,071
Goodwill, net ......................................................................... 6,213 6,266
Other intangible assets, net .......................................................... 6,264 8,596
Other assets .......................................................................... 895 768
---------- ----------
Total assets .......................................................................... $ 43,975 $ 52,664
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ...................................................................... $ 6,464 $ 7,733
Accrued expenses ...................................................................... 10,432 14,709
Current portion of notes payable ...................................................... 10,550 3,825
Other current liabilities ............................................................. 1,467 2,199
Net liabilities of discontinued operations ............................................ 928 528
---------- ----------
Total current liabilities ............................................................. 29,841 28,994
---------- ----------
Notes payable, less current portion ................................................... -- 9,600
Other long term liabilities ........................................................... 1,753 1,100
---------- ----------
Total liabilities ..................................................................... 31,594 39,694
---------- ----------
Stockholders' equity:
Common stock, $0.01 par value; 510,000,000 shares authorized at December 31,
2005 and 2004: Class A--500,000,000 shares authorized at December 31, 2005 and
2004, 45,225,130 and 44,174,459 shares issued and outstanding at December 31,
2005 and 2004, respectively ......................................................... 452 441
Additional paid-in capital ............................................................ 554,337 553,420
Accumulated other comprehensive loss .................................................. (670) (238)
Accumulated deficit ................................................................... (541,738) (540,653)
---------- ----------
Total stockholders' equity ............................................................ 12,381 12,970
---------- ----------
Commitments and contingencies
Total liabilities and stockholders' equity ............................................ $ 43,975 $ 52,664
========== ==========
See accompanying notes to consolidated financial statements.
36
EASYLINK SERVICES CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except share and per share data)
YEAR ENDED DECEMBER 31,
------------------------------------------
2005 2004 2003
------------ ------------ ------------
Revenues ............................................................. $ 78,659 $ 91,840 $ 101,347
Operating expenses:
Cost of revenues ..................................................... 29,929 36,129 49,553
------------ ------------ ------------
Gross profit ......................................................... 48,730 55,711 51,794
------------ ------------ ------------
Operating expenses:
Sales and marketing .................................................. 19,449 18,715 18,379
General and administrative ........................................... 19,925 23,731 24,405
Product development .................................................. 6,768 6,730 6,383
Separation agreement costs ........................................... 2,312 -- --
Amortization of intangible assets .................................... 2,068 2,066 2,066
(Gain) loss on sale of businesses/MailWatch service line ............ 250 (5,017) --
Impairment of intangible assets ...................................... -- 750 --
Restructuring charges (credits) ...................................... -- (350) 1,478
------------ ------------ ------------
50,772 46,625 52,711
------------ ------------ ------------
Income (loss) from operations ........................................ (2,042) 9,086 (917)
------------ ------------ ------------
Other income (expense):
Interest income ...................................................... 136 247 36
Interest expense ..................................................... (1,420) (517) (1,390)
Gain on domain names repurchase agreement ............................ 1,907 -- --
Gain on debt restructuring and settlements ........................... -- 984 54,078
Other, net ........................................................... (16) 290 79
------------ ------------ ------------
Total other income, net .............................................. 607 1,004 52,803
------------ ------------ ------------
Income (loss) from continuing operations before income taxes ......... (1,435) 10,090 51,886
Provision (credit) for income taxes .................................. (350) 2,400 --
------------ ------------ ------------
Income (loss) from continuing operations ............................. (1,085) 7,690 51,886
------------ ------------ ------------
Loss from discontinued operations, net of taxes ...................... -- -- (938)
------------ ------------ ------------
Net income (loss) .................................................... $ (1,085) $ 7,690 $ 50,948
============ ============ ============
Basic net income (loss) per share:
Income (loss) from continuing operations ............................. $ (0.02) $ 0.17 $ 1.47
Loss from discontinued operations .................................... -- -- (0.03)
------------ ------------ ------------
Basic net income (loss) per share .................................... $ (0.02) $ 0.17 $ 1.44
============ ============ ============
Diluted net income (loss) per share:
Income (loss) from continuing operations ............................. $ (0.02) $ 0.17 $ 1.46
Loss from discontinued operations .................................... -- -- (0.03)
------------ ------------ ------------
Diluted net income (loss) per share .................................. $ (0.02) $ 0.17 $ 1.43
============ ============ ============
Weighted-average basic shares outstanding ............................ 44,687,377 44,004,271 35,401,809
============ ============ ============
Weighted-average diluted shares outstanding .......................... 44,687,377 44,891,039 35,653,336
============ ============ ============
See accompanying notes to consolidated financial statements.
37
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, 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
============ ============ ============ ============ ============
Net income (loss) ............................. -- -- -- -- --
Unrealized holding gains on
marketable securities ......................... -- -- -- -- --
Cumulative foreign currency
translation ................................... -- -- -- -- --
Comprehensive income (loss).................... -- -- -- -- --
Issuance of Class A common stock
In connection with 401(k) plan .............. 499,617 5 -- -- 470
Proceeds from the exercise of stock
options ....................................... 131,750 2 -- -- 94
Issuance of Class A common stock
in connection with Quickstream
acquisition ................................. 419,304 4 353
------------ ------------ ------------ ------------ ------------
Balance at December 31, 2005 .................. 45,225,130 $ 452 $ -- $ 554,337
============ ============ ============ ============ ============
38
ACCUMULATED TOTAL
OTHER STOCKHOLDERS'
COMPREHENSIVE ACCUMULATED (DEFICIT)/
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 ............................................ -- 7,690 7,690
Unrealized holding gains on marketable securities ..... 529 -- 529
Cumulative foreign currency translation ............... (495) -- (495)
-------------- -------------- --------------
Comprehensive income .................................. 34 7,690 7,724
-------------- -------------- --------------
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 .......................... $ (238) $ (540,653) $ 12,970
============== ============== ==============
Net income (loss) ..................................... -- (1,085) (1,085)
Unrealized holding gains on marketable securities ..... (529) -- (529)
Cumulative foreign currency translation ............... 97 -- 97
-------------- --------------
Comprehensive income (loss)............................ (432) (1,085) (1,517)
-------------- -------------- --------------
Issuance of Class A common stock
in connection with 401(k) plan ..................... -- -- 475
Proceeds from the exercise of stock options ........... -- -- 96
Issuance of Class A common stock in connection
with Quickstream acquisition ....................... -- -- 357
Other ................................................. -- --
-------------- -------------- --------------
Balance at December 31, 2005 .......................... $ (670) $ (541,738) $ 12,381
============== ============== ==============
39
EASYLINK SERVICES CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
YEAR ENDED DECEMBER 31,
------------------------------------------
2005 2004 2003
------------ ------------ ------------
(revised)
Cash flows from operating activities:
Net income (loss) ...................................................... $ (1,085) $ 7,690 $ 50,948
Adjustments to reconcile net income (loss) to net cash provided by
(used in) operating activities:
Loss from discontinued operations ...................................... -- -- 938
Depreciation and amortization .......................................... 3,118 5,041 8,295
Amortization of other intangible assets ................................ 2,332 2,284 2,919
Provision for doubtful accounts ........................................ 59 450 1
Provision for restructuring charges (credits) .......................... (350) 1,478
Gain on debt restructuring and settlements ............................. (984) (54,078)
Issuance of shares as matching contributions to employee benefit
plans ................................................................. 475 400 492
Other non-cash charges ................................................. 35 222 368
Separation agreement costs ............................................. 2,312 -- --
(Gain) on sale of domain names repurchase rights ....................... (1,907) -- --
(Gain) loss on sale of businesses/Mailwatch service line ............... 250 (5,017) --
Loss on sale of marketable securities .................................. 469 -- --
Impairments of intangibles ............................................. -- 750 --
Changes in operating assets and liabilities:
Marketable securities ................................................ -- (1,502) --
Accounts receivable, net ............................................. 408 1,416 508
Prepaid expenses and other current assets ............................ 1,086 290 260
Other assets ......................................................... (127) 265 460
Accounts payable, accrued expenses and other liabilities ............. (7,534) (5,001) (4,931)
------------ ------------ ------------
Net cash provided by (used in) operating activities of continuing
operations ............................................................ (109) 5,954 7,658
Net cash provided by (used in) operating activities of discontinued
operations (revised) .................................................. 400 (300) (356)
------------ ------------ ------------
Net cash provided by operating activities .............................. 291 5,654 7,302
Cash flows from investing activities:
Purchases of property and equipment, including capitalized software .... (4,596) (2,564) (4,214)
Proceeds from sale of businesses/Mailwatch service line ................ 3,500 --
Proceeds from sale of assets/domain names repurchase rights ............ 830 1,000 --
Proceeds from sale of marketable securities ............................ 1,021 -- --
Cash paid for Quickstream acquisition .................................. (342) -- --
------------ ------------ ------------
Net cash provided by (used in) investing activities .................... (3,087) 1,936 (4,214)
------------ ------------ ------------
Cash flows from financing activities:
Proceeds of bank loan advances ......................................... 1,900 -- --
Payment of bank loan advances .......................................... (950) -- --
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 .......................................... 96 32 70
Payments under capital lease obligations ............................... (330) (472) (426)
Proceeds from notes payable ............................................ -- 12,000 --
Principal payments of notes payable .................................... (3,825) (12,053) (5,793)
Interest payments on restructured notes and capitalized interest ....... -- (1,009) (843)
------------ ------------ ------------
Net cash used in financing activities .................................. (3,109) (1,502) (5,992)
------------ ------------ ------------
Effect of foreign exchange rate changes on cash and cash equivalents ... (29) (495) (27)
------------ ------------ ------------
Net increase (decrease) in cash and cash equivalents ................... (5,934) 5,593 (2,931)
Cash and cash equivalents at beginning of the year ..................... 12,216 6,623 9,554
------------ ------------ ------------
Cash and cash equivalents at the end of the year ....................... $ 6,282 $ 12,216 $ 6,623
============ ============ ============
Supplemental disclosures of cash flow information:
Cash paid for interest ................................................. $ 1,208 $ 497 $ 691
Net cash paid for taxes ................................................ $ 415 $ 173 $ 48
Purchases of property, plant and equipment through capital lease
obligations............................................................. $ 91 $ 649 --
See accompanying notes to consolidated financial statements.
Supplemental Disclosure of Non-Cash Information:
The Company issued 425,000 shares in August, 2005 in connection with the
acquisition of Quickstream Software, Inc.
The Company issued 35,530 and 284,304 shares of Class A common stock valued at
approximately $48,000 and $184,000, respectively, as payment of interest in lieu
of cash for the years ended December 31, 2004 and 2003, respectively.
40
EASYLINK SERVICES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2005 AND 2004
(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) LIQUIDITY, GOING CONCERN 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, an accumulated deficit and declining revenues for each of
the last three years that raise substantial doubt about its ability to continue
as a going concern. In addition, the Company is required to raise $4 million in
new equity or subordinated debt financing and repay $3 million of its
outstanding term loan under its credit agreement, as amended, with Wells Fargo
by May 1, 2006. 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 the required financing and additional financing, if
necessary,the Company may be unable to continue as a going concern. Since the
Company's ability to complete the required financing and to meet the revised
EBITDA covenants of the credit agreement is not certain, the total outstanding
obligations under the credit agreement have been included in current liabilities
in the consolidated balance sheet as of December 31, 2005.
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 required to meet its obligations
under the credit agreement and as may otherwise be required, and to maintain
profitable operations.
The Company has received letters of intent for $4.3 million of a proposed $5.4
million common stock financing. The Company is pursuing this financing and
alternative financings to meet the May 1, 2006 obligations under its credit
agreement and to fund working capital needs. 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 respective dates of
acquisition. 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
41
been eliminated in consolidation. 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.
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.
(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 maturities of three
months or less when acquired, to be cash equivalents.
(F) MARKETABLE SECURITIES
All of the Company's marketable securities are classified as available-for-sale
securities. Accordingly, net unrealized gains as of December 31, 2004 are
reflected as a separate component of stockholders' equity. As of December 31,
2005 the Company had sold all its marketable securities for net proceeds of $1.0
million resulting in a realized loss of $469,000 which is included in other
income (expense) in the statement of operations for 2005.
(G) ACCOUNTS RECEIVABLE AND ALLOWANCE FOR DOUBTFUL ACCOUNTS
Accounts receivable represent trade receivables billed to customers in arrears
on a monthly basis. Receivables are recorded in the period the related revenues
are earned and, generally, are collected within a short time period. The Company
does not require collateral from its customers and any balances over 30 days old
are considered past due.
The allowance for doubtful accounts is based upon the Company's assessment of
the collectibility of customer accounts receivable. The Company regularly
reviews the allowance by considering factors such as historical experience,
credit quality, the age of accounts receivable balances and current economic
conditions that may affect a customer's ability to pay.
(H) PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Expenditures for additions and
improvements are capitalized. The cost of repairs and maintenance, including the
cost of replacing minor items that do not constitute a substantial betterment,
are charged to operations as incurred. 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.
42
(I) ACCOUNTING FOR IMPAIRMENT OF LONG-LIVED AND INTANGIBLE ASSETS
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 was determined to have an
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 which range from three
to five years. See note 7.
(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 to the extent it is
anticipated that it is more likely than not that the deferred tax assets will
not 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 include revenues from the licensing of domain names in 2004 and
2003. Revenue is recognized ratably over the license period and amounted to
$392,000 and $475,000 in 2004 and 2003, respectively. In December, 2004, the
Company sold its domain name assets to the former Chairman of the Board of
Directors. See Note 5.
43
(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, at December 31, 2004, convertible notes payable.
At December 31, 2005 and 2004, the fair value of cash, cash equivalents,
marketable securities in 2004 only and accounts receivable approximated their
financial statement carrying amount because of the short-term maturity of these
instruments. The recorded values of loans payable and notes payable approximate
their fair values, as interest approximates market rates. Convertible
subordinated notes payable of $1.4 million at December 31, 2004 carried a fixed
interest rate but since these notes were paid at their maturity in February
2005, management estimated that their fair value approximated their carrying
value.
The Company holds cash and cash equivalents at several major financial
institutions in amounts which often exceed FDIC insured limits. The Company has
not experienced any losses due to such concentration of credit risk.
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 2005, 2004 or 2003. Revenues from the Company's five largest customers
amounted to $9.8 million, $9.5 million and $7.1 million aggregating to 11%, 10%
and 7% of the Company's total revenues in 2005, 2004 and 2003, respectively.
(P) STOCK-BASED COMPENSATION PLANS
In 2005, 2004 and 2003, the Company had stock option plans, which are described
more fully in Note 16. As allowed by SFAS No. 123, Accounting for Stock-Based
Compensation, as amended by SFAS No. 148, the Company has retained the
compensation measurement principles of Accounting Principles Board (APB) Opinion
No. 25, Accounting for Stock Issued to Employees, and its related
interpretations for stock options. The Company adopted the disclosure provisions
of SFAS No. 148 as of December 31, 2002 and continues to apply the measurement
provisions of APB 25. Under APB Opinion No. 25, compensation expense is
recognized based upon the difference, if any, at the measurement date between
the market value of the stock and the option exercise price and amortized on a
straight-line basis over the vesting period. The measurement date is the date at
which both the number of options and the exercise price for each option are
known. The following table illustrates the effect on net income (loss) and net
income (loss) per share if the fair value recognition provisions of SFAS No. 123
had been applied to stock-based employee compensation.
44
($ IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) FOR THE YEAR ENDED DECEMBER 31,
--------------------------------------
2005 2004 2003
---------- ---------- ----------
Net income (loss):
Income (loss) from continuing operations, as reported ..... $ (1,085) $ 7,690 $ 51,886
Deduct total stock based employee compensation expense
determined under the fair value method for all awards,
net of tax ............................................... (1,732) (2,769) (8,394)
---------- ---------- ----------
Pro forma income (loss) from continuing operations ........ $ (2,817) 4,921 43,492
Loss from discontinued operations ......................... -- -- (938)
---------- ---------- ----------
Proforma net income (loss) ................................ $ (2,817) $ 4,921 $ 42,554
========== ========== ==========
Basic net income (loss) per share:
Income (loss) from continuing operations as reported ...... $ (0.02) $ 0.17 $ 1.47
Deduct total stock based employee compensation
expense determined under the fair value method for
all awards, net of tax ................................... $ (0.04) $ (0.06) $ (0.24)
---------- ---------- ----------
Pro forma income (loss) from continuing operations ........ $ (0.06) $ 0.11 $ 1.23
Loss from discontinued operations ......................... -- -- $ (0.03)
---------- ---------- ----------
Proforma basic net income (loss) .......................... $ (0.06) $ 0.11 $ 1.20
========== ========== ==========
Diluted net income (loss) per share:
Income (loss) from continuing operations as reported ...... $ (0.02) $ 0.17 $ 1.46
Deduct total stock based employee compensation
Expense determined under the fair value method for
All awards, net of tax ................................... $ (0.04) $ (0.06) $ (0.24)
---------- ---------- ----------
Pro forma income (loss) from continuing operations ........ $ (0.06) $ 0.11 $ 1.22
Loss from discontinued operations ......................... -- $ -- (0.03)
---------- ---------- ----------
Proforma diluted net income (loss) ........................ $ (0.06) $ 0.11 $ 1.19
========== ========== ==========
The resulting effect on the pro forma net income (loss) disclosed for the years
ended December 31, 2005, 2004 and 2003 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
$175.00 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.
In December, 2005 the Company accelerated the vesting of all current employee
options with an exercise price in excess of $0.92 per share to avoid the
recording of this expense in future periods when the Company will adopt FAS
123R. This action resulted in a $1,038,000 increase in the stock based
compensation and proforma loss for 2005 as reflected above.
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 2005: dividend yield of zero percent (0%), average risk-free
interest rate of 3.9%, expected life of 5 years and volatility of 119%, 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%.
(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.
Diluted net loss per share is equal to basic loss per share for the year ended
December 31, 2005, since all common stock equivalents are anti-dilutive for this
period. 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.
45
Diluted net income (loss) per common share for the years ended December 31, 2004
and 2003, does not include the effects of employee options to purchase 1,524,086
and 1,429,516 shares of common stock, respectively, and 798,523 common stock
warrants in each year, as their inclusion would be antidilutive.
(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 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 annual period
that begins after June 15, 2005. The Company will adopt SFAS 123(R) in 2006 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. As a result of the acceleration of all options with an
exercise price in excess of $.92 per share, the Company believes that the impact
of adopting SFAS 123(R) will not have a material affect on its financial
statements in the first quarter of 2006 based upon outstanding options as of
December 31, 2005.
46
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. The Company dos
not plan to repatriate foreign earnings that have not yet been remitted to the
U.S. and, accordingly, adoption of FSP FAS 109-2 had no impact on the Company's
results of operations or its financial position.
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.
In May 2005, the FASB issued SFAS No. 154, "Accounting Changes and
Error Corrections". SFAS No. 154 replaces Accounting Principles Board
Opinion No. 20, "Accounting Changes" and FASB Statement No. 3,
"Reporting Accounting Changes in Interim Financial Statements", and
changes the accounting for and reporting of a change in accounting
principle. SFAS No. 154 applies to all voluntary changes in accounting
principle and to changes required by an accounting pronouncement when
specific transition provisions are not provided. SFAS No. 154 requires
retrospective application to prior periods financial statements for changes in
accounting principles, unless it is impractical to determine the specific
period or cumulative effect of the change. SFAS No. 154 is effective for
accounting changes and corrections of errors made in fiscal years beginning
after December 15, 2005.
(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 the consolidated statements of operations as part
of other income (expense) and amounted to $(151,000), $13,000 and $(59,000) for
the years ended December 31, 2005, 2004 and 2003, respectively.
(U) RECLASSIFICATION
Certain amounts in the consolidated balance sheet as of December 31, 2004 have
been reclassified to conform to the presentation as of December 31, 2005.
Amounts at December 31, 2004 representing balances due to former customers and
amounts due to foreign government telecommunications authorities and telex
carriers, which were previously classified within accounts receivable, have been
reclassified to accounts payable or accrued expenses.
Cash flow from discontinued operations for 2004 has been revised to present the
results in the consolidated statement of operations for that year in the
applicable operating, investing or financing activities to conform to the
presentation for 2005.
(2) RESTATEMENT OF 2004 FINANCIAL STATEMENTS
The Company has restated its previously issued financial statements for the year
ended December 31, 2004 in a Form 10K/A filed on December 8, 2005. The Company's
determination to restate these previously issued financial statements stems from
the following items:
47
1. The liability for telecommunication services costs of the Company's
United Kingdom subsidiary was over-stated. The Company has revised its
methodology to more accurately estimate this liability resulting in a
decrease in the estimated liability and related costs of revenues of
$603,000 for 2004.
2. The Company had recorded accruals for certain assessed Federal
regulatory fees in prior years although the amounts of such
assessments were disputed by the Company. Based upon revised
assessments received by the Company in the 4th quarter of 2004, the
amounts of such accruals were in excess of the revised assessments.
However, the Company did not timely adjust the recorded liability for
this change in circumstances. The amount of the accrual no longer
required and adjusted for in the restatement is $296,000.
3. The Company has determined that it did not properly account for
certain equipment purchased in prior years. As a result the Company
has recorded $47,000 in additional depreciation expense in 2004
related to these assets.
4. The Company has evaluated its liability in connection with a New York
State sales tax audit of one of its operating subsidiaries for 2001
through 2004. The Company has now determined that the estimated
liability for these taxes should have been increased in the 4th
quarter of 2004 based on a tax assessment received in 2005 but prior
to the issuance of the Company's Form 10K for the year ended December
31, 2004. The increase in the estimated liability is $90,000.
5. The Company incorrectly calculated the net operating loss carry
forwards of its United Kingdom subsidiaries as of December 31, 2003
resulting in the under accrual of foreign income tax liabilities of
$295,000 in 2004.
6. The restatement also includes the recording of adjustments in prior
periods that were not recorded in these periods because in each case
and in the aggregate the amount of these errors were not material to
the Company's consolidated financial statements.
7. The Company had incorrectly classified and recorded currency
translation losses at December 31, 2004. As a result, the accumulated
other comprehensive loss account included in stockholders' equity at
December 31, 2004 has been increased by $166,000 and accrued expenses
has been reduced by such amount.
The following schedules show the impact of the restatement on the relevant
captions from the Company's consolidated financial statements as of December 31,
2004 and for the year then ended as included in a previously filed Form 10K/A
prior to the reclassifications to conform to the 2005 presentation.
48
CONSOLIDATED BALANCE SHEET
AS OF DECEMBER 31, 2004
ADJUSTMENTS
--------------------------------------------------------
AS
PREVIOUSLY
REPORTED AMOUNT NO. AS RESTATED
----------- ----------- ----------- -----------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents ........................ $ 12,300 (84) 6 $ 12,216
Marketable securities ............................ 2,023 2,023
Accounts receivable, net of allowance for
doubtful accounts ................................ 9,624 (60) 6 9,564
Prepaid expenses and other current assets ........ 2,578 263 6 2,841
----------- ----------- -----------
TOTAL CURRENT ASSETS ............................. 26,525 26,644
Property and equipment net ....................... 8,125 (54) 3,6 8,071
Goodwill, net .................................... 6,266 6,266
Other intangible assets, net ..................... 8,846 (250) 8,596
Other assets ..................................... 764 4 768
----------- ----------- -----------
TOTAL ASSETS ..................................... 50,526 (181) 50,345
=========== =========== ===========
LIABILITIES AND STOCKHOLDERS EQUITY
CURRENT LIABILITIES:
Accounts payable ................................. $ 6,523 (52) 6 $ 6,471
Accrued expense .................................. 13,891 (239) 1,2,4,5,6,7 13,652
Current portion of notes payable ................. 3,825 3,825
Other current liabilities ........................ 2,136 63 6 2,199
Net liabilities of discontinued operations ....... 528 528
----------- ----------- -----------
TOTAL CURRENT LIABILITIES ........................ 26,903 26,675
Notes payable, less current portion .............. 9,600 9,600
Other long term liabilities ...................... 975 125 6 1,100
----------- ----------- -----------
TOTAL LIABILITIES ................................ 37,478 (103) 37,375
STOCKHOLDERS' EQUITY
Common stock ..................................... 441 441
Additional paid-in-capital ....................... 553,420 553,420
Accumulated other comprehensive loss ............. (72) (166) 6,7 (238)
Accumulated deficit .............................. (540,741) 88 (540,653)
----------- ----------- -----------
TOTAL STOCKHOLDERS' EQUITY ....................... 13,048 (78) 12,970
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY ....... 50,526 (181) 50,345
=========== =========== ===========
49
CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 2004
ADJUSTMENTS
--------------------------------------------------------
AS
PREVIOUSLY
REPORTED AMOUNT NO. AS RESTATED
----------- ----------- ----------- -----------
TOTAL REVENUES ................................... $ 91,840 $ 91,840
Operating expenses:
Cost of revenues ................................. 36,725 (596) 1,6 36,129
----------- ----------- -----------
GROSS PROFIT ..................................... 55,115 596 55,711
Sales and marketing .............................. 18,715 18,715
General and administrative ....................... 23,794 (63) 2,3,4,6 23,731
Product development: ............................. 6,730 6,730
Amortization of Intangibles ...................... 2,066 2,066
Restructuring Charge ............................. (350) (350)
Impairment of intangible assets .................. 500 250 6 750
Gain on sale of buisnesses/MailWatch service line (5,017) (5,017)
----------- ----------- -----------
46,438 187 46,625
INCOME FROM OPERATIONS ........................... 8,677 409 9,086
Interest income .................................. 70 177 6 247
Interest expense ................................. (517) (517)
Other income (expense) ........................... 288 2 6 290
Gain on settlement of debt ....................... 984 984
----------- ----------- -----------
Income before income taxes ....................... 9,502 588 10,090
----------- ----------- -----------
Provision for income taxes ....................... 1,900 500 5,6 2,400
----------- ----------- -----------
NET INCOME ....................................... $ 7,602 $ 88 $ 7,690
=========== =========== ===========
BASIC NET INCOME PER SHARE ....................... $ 0.17 $ 0.00 $ 0.17
=========== =========== ===========
DILUTED NET INCOME PER SHARE ..................... $ 0.17 $ 0.00 $ 0.17
=========== =========== ===========
COMPREHENSIVE INCOME ............................. $ 7,802 $ (78) $ 7,724
=========== =========== ===========
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 2004
ADJUSTMENTS
--------------------------------------------------------
AS
PREVIOUSLY
REPORTED AMOUNT NO. AS RESTATED
----------- ----------- ----------- -----------
Net cash provided by operating
activities of continuing operations ............ $ 6,278 $ (324) $ 5,954
=========== =========== ===========
Net cash provided by investing
activities ..................................... 1,530 406 1,936
=========== =========== ===========
Net cash used in financing
activities ..................................... (1,502) -- (1,502)
=========== =========== ===========
Net increase in cash and cash
equivalents .................................... 5,977 (84) 5,893
=========== =========== ===========
50
(3) ACQUISITION OF QUICKSTREAM SOFTWARE, INC.
On August 1, 2005 the company completed the acquisition of Quickstream Software,
Inc., a software technology company, for a total purchase price of $699,000
which was comprised of approximately $342,000 in cash and 425,000 shares of the
Company's Class A common stock valued at approximately $357,000. The purchase of
Quickstream provided the Company with certain proprietary software that has been
integrated into the Company's network to add new features for certain of the
Company's services.
The results for Quickstream have been included in the consolidated financial
statements from the date of acquisition. The total purchase price, including
transaction costs, has been allocated over the acquired assets and assumed
liabilities with assistance from an independent appraiser. Goodwill of $197,000
has been recorded as a result of the allocation.
(4) SALE OF BUSINESSES/MAILWATCH SERVICE LINE
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. At December 31, 2004 an unrealized gain related to the
Infocrossing stock of $521,000 was included in the accumulated other
comprehensive gain(loss) account in stockholders' equity. The Infocrossing stock
was sold by the Company for $1.0 million in September, 2005 resulting in a loss
of $469,000 that is reported as other income (expense) in the statement of
operations.
In September 2005, the Company entered into two separate agreements for the sale
of its fax businesses, including the customer bases and customer premise
equipment, in Singapore and Malaysia. Consideration for the sales is based on
future revenues and, net of future costs, for the Malaysia transaction. In
accordance with FAS No. 141, "Business Combinations", because of the contingent
nature of the proceeds, the Company will record these amounts as received. The
Company has recorded a loss on the sales of approximately $250,000 representing
the net book value of the businesses at date of sales.
(5) 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 2004. In addition to the
initial purchase price, the agreement provided for the Company to 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 had 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 original 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.
In August 2005, the Company entered into a new agreement to terminate its right
to receive a share of the revenues and its option to purchase back the domain
names for a total consideration of $2 million consisting of $700,000 in cash, a
$1,130,000 non-interest bearing note and the cancellation of $170,000 in
severance payments due to the former Chairman. The transaction resulted in a
gain of $1,907,000 in 2005 after recording the note payable at its estimated
fair value. As of December 31, 2005, $473,000 of the discounted outstanding
balance on the note is included in prepaid expenses and other current assets and
$444,000 is included in other assets.
51
(6) 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,
-----------------------
2005 2004
---------- ----------
Computer equipment and software .................. $ 43,082 $ 40,284
Furniture and fixtures ........................... 1,577 1,589
Leasehold improvements ........................... 4,196 2,282
---------- ----------
Subtotal ......................................... 48,855 44,155
Less accumulated depreciation and amortization ... 38,603 36,084
---------- ----------
Property and equipment, net ...................... $ 10,252 $ 8,071
========== ==========
Depreciation and amortization expense of property and equipment totaled $3.1
million, $5.0 million and $8.3 million for the years ended December 31, 2005,
2004 and 2003, respectively.
(7) GOODWILL AND INTANGIBLE ASSETS
The Company completed its annual assessment of its goodwill and indefinite-lived
intangible assets in the quarter ended December 31 for each of the years 2005,
2004 and 2003 with the assistance of an independent appraiser. The methodology
used to determine the business enterprise valuation 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 trademark and developed technology was based
on the income approach, 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.
For 2005 and 2003 the Company determined that there was no impairment of these
assets. For 2004, the Company determined that there was an impairment of its
trademark of $750,000.
Included in the Company's balance sheet as of December 31, 2005 and 2004 are the
following (in thousands):
AS OF DECEMBER 31, 2005
----------------------------------------
ACCUMULATED
GROSS COST AMORTIZATION NET
---------- ------------ ----------
Intangibles with indefinite lives:
Goodwill .............................................. $ 152,606 $ 146,393) $ 6,213
========== ============ ==========
Trademarks ............................................ $ 15,250 $ (10,400) $ 4,850
========== ============ ==========
Intangibles with finite lives:
Technology ............................................ $ 16,550 $ (16,234) $ 316
Customer list ......................................... 11,000 (10,114) 886
Software development and licenses ..................... 4,564 (4,352) 212
---------- ------------ ----------
$ 32,114 $ (30,700) $ 1,414
========== ============ ==========
52
AS OF DECEMBER 31, 2004
----------------------------------------
ACCUMULATED
GROSS COST AMORTIZATION NET
---------- ------------ ----------
Intangibles with indefinite lives:
Goodwill .............................................. $ 152,659 $ (146,393) $ 6,266
========== ============ ==========
Trademarks ............................................ $ 15,250 $ (10,400) $ 4,850
========== ============ ==========
Intangibles with finite lives:
Technology ............................................ $ 16,550 $ (14,339) $ 2,211
Customer list ......................................... 11,000 (9,943) 1,057
Software development and licenses ..................... 4,564 (4,086) 478
---------- ------------ ----------
$ 32,114 $ (28,368) $ 3,746
========== ============ ==========
The Company's estimated amortization expense is $0.6 million, $0.2 million, $0.2
million, and $0.2 million in 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 three to five years.
(8) CARRIER SETTLEMENT AGREEMENT
In November 2005, the Company entered into a Settlement Agreement with Verizon
Business (formerly MCI WorldCom) ("MCI") related to certain accounts receivable
and accounts payable balances with MCI that were outstanding prior to MCI's
bankruptcy filing in 2002. The agreement also included a settlement of claims
made by the Company that MCI had charged, and the Company had paid, amounts for
telecommunications services from MCI in excess of the contracted rates prior to
the bankruptcy filing. As a result of the settlement, the Company recorded a
$110,000 reduction of its bad debt expense representing the recovery of the
accounts receivable balance from MCI and recorded a reduction in its cost of
service for $540,000 representing the recovery of charges stemming from its
claim of excess telecommunication charges by MCI in 2005.
(9) SEPARATION AGREEMENT
In January 2005, the Company entered into a Separation Agreement with George Abi
Zeid, its former President of the International division, wherein Mr. Abi Zeid
resigned as an officer and director of the Company. Under the agreement, the
Company agreed to pay Mr. Abi Zeid $240,000 as a severance payment on the
effective date of his resignation and $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 former employees of the Company. As
of December 31, 2005 $565,000 related to the agreement is included in accrued
expenses and $672,000 is included in other long term liabilities.
53
(10) ACCRUED EXPENSES
Accrued expenses consist of the following, in thousands:
DECEMBER 31,
-----------------------
2005 2004
---------- ----------
Carrier charges .................................. $ 2,558 $ 4,274
Payroll and related costs ........................ 1,611 2,835
Sales/Use/VAT taxes payable ...................... 1,037 1,300
Federal, state and foreign income taxes payable .. 1,665 2,280
Professional services, consulting fees and sales
agents commissions ............................. 1,411 1,581
Separation agreement payable, current portion .... 565 --
Other ............................................ 1,585 2,439
---------- ----------
Total ............................................ $ 10,432 $ 14,709
========== ==========
(11) LOANS AND NOTES PAYABLE
Loans and notes payable include the following, in thousands:
DECEMBER 31,
-----------------------
2005 2004
---------- ----------
Term loan payable ................................ $ 9,600 $ 12,000
Advances payable ................................. 950 --
7% Convertible Subordinated Notes,
due February 1, 2005 ........................... -- 1,425
---------- ----------
Total loans and notes payable .................... 10,550 13,425
Current portion .................................. 10,550 3,825
---------- ----------
Long term portion ................................ $ 0 $ 9,600
========== ==========
TERM LOAN PAYABLE AND ADVANCES 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. $10.9 million of the proceeds from the Term Loan were used by the
Company to repay all of its then outstanding debt, including the outstanding
balance of the 7% Convertible Subordinated Notes on their maturity date of
February 1, 2005. The balance of the proceeds were used to fund other cash
requirements of the Company's operations. As a result of the debt repayment,
$984,000 of previously capitalized interest on certain restructured debt 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 (11% as of December 31, 2005) 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%
54
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 (8% as of December 31, 2005) 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. At December 31, 2005 the Company had $950,000 in outstanding
Advances and approximately $3.2 million of availability under the line of
credit.
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 of
cumulative quarterly levels of EBITDA. 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 $2.5 million from the
calculation of EBITDA for covenant compliance purposes. Additionally, in
December 2005 Wells Fargo agreed to waive the EBIDTA covenant for the quarter
ended December 31, 2005 and granted the Company certain other limited waivers
pending further agreement on the financial covenants applicable to future
periods.
On February 27, 2006 the Company entered into an amendment to the Credit
Agreement establishing revised cumulative monthly EBITDA covenants but
eliminating the Company's ability to draw down any future Advances and also
requiring the Company to pay the outstanding Advances balance of $950,000. The
amendment also requires the Company to obtain at least $4.0 million in new
subordinated debt or equity financing and to prepay $3.0 million of the Term
Loan, both by May 1, 2006. The Company repaid the $950,000 in Advances in
February 2006. The Company has received letters of intent for $4.3 million of a
proposed $5.4 million common stock financing. The Company is pursuing this
financing and alternative financings to meet the May 1, 2006 obligations under
its credit agreement. However, since the Company's ability to complete the
required financing and to meet the revised EBITDA covenants are not certain, the
total outstanding obligations under the credit agreement have been included in
current liabilities in the consolidated balance sheet as of December 31, 2005.
7% CONVERTIBLE SUBORDINATED NOTES
The 7% Convertible Subordinated Notes outstanding as of December 31, 2004
represent the balance outstanding from $100 million in notes issued on January
26, 2000. The Notes were 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 amount at December 31, 2004
which was paid on the maturity date of February 1, 2005.
GAIN ON DEBT RESTRUCTURING AND SETTLEMENTS IN 2003
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 a
former officer and shareholder 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. 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.
(12) DISCONTINUED OPERATIONS
World.com, a previously formed subsidiary to develop the Company's sold
portfolio of domain names, has been reflected as a discontinued operation.
Accordingly, revenues, costs and expenses, assets, liabilities and cash flows
55
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 provided by (used
in) operating activities of discontinued operations," for all periods presented.
All of the World.com businesses were either sold or ceased operations in 2001.
The loss amount for discontinued operations in 2003 and increase in accrued
expenses in 2005 represent the net potential liability for a judgment against
the Company related to the India.com subsidiary business of World.com and a
refund of a related $400,000 escrow deposit, respectively. See Note 21, "Legal
proceedings".
Summarized financial information (In thousands) for the discontinued operation
is as follows:
STATEMENTS OF OPERATIONS DATA
YEAR ENDED DECEMBER 31,
--------------------------------------
2005 2004 2003
---------- ---------- ----------
Revenues ........................................ $ -- $ -- $ --
========== ========== ==========
Loss from discontinued operations ............... $ -- $ -- $ 938
========== ========== ==========
BALANCE SHEET DATA AS OF
DECEMBER 31,
--------------------------
2005 2004
----------- -----------
Cash ............................................. $ 17 $ 17
Accrued expenses ................................. 945 545
Net liabilities of discontinued operations ....... (928) (528)
(13) 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. The lease for the Company's United States headquarters, laboratory
and network center includes rent escalations amounting to $362,000 per annum as
of July 1, 2006 and $67,000 per annum as of July 1, 2008. The escalations have
been accounted for on a straight-line basis over the entire term of the lease
which commenced on March 1, 2003 and terminates June 30, 2013. Rent expense for
operating leases for the years ending December 31, 2005, 2004 and 2003 was
approximately $3.8 million, $3.6 million, and $4.2 million, respectively.
At December 31, 2005 and 2004, the Company had $598,000 and $507,000,
respectively, in gross amount of fixed assets and $224,000 and $67,000,
respectively, 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, 2005 are as follows, in thousands:
YEAR ENDING DECEMBER 31,
CAPITAL OPERATING
LEASES LEASES
---------- ----------
2006 ............................................. $ 53 $ 2,536
2007 ............................................. 28 1,874
2008 ............................................. 19 1,367
2009 ............................................. 21 1,390
2010 ............................................. 2 1,390
2011 and later ................................... -- 2,717
---------- ----------
Total minimum lease payments ................ $ 123 $ 11,274
========== ==========
Less current portion of obligations under
capital leases .................................. 53
Obligations under capital leases, excluding
current portion .................................. $ 70
==========
56
Of the total operating lease commitments as of December 31, 2005 noted above,
$11.1 million is for occupied properties and $0.2 million is for abandoned
properties, which represents the restructuring reserve. The balance for capital
leases and related interest as of December 31, 2005 is for computer equipment
and software.
(14) RELATED PARTY TRANSACTIONS
FEDERAL PARTNERS, L.P. FINANCINGS
On May 1, 2003, Federal Partners exchanged a $5 million 10% Senior Convertible
Note due January 8, 2006 payable by the Company for 2.5 million shares of Class
A common stock value of approximately $1.4 million in connection with the
Company's restructuring of most of its outstanding debt at the time. 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. 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. 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.
In connection with the Company's 2001 acquisition of Swift Telecommunications,
Inc. ("STI"), including the EasyLink Services business of AT&T, George Abi Zeid,
the sole shareholder of STI, was elected to the Board of Directors of the
Company and was appointed President - International Operations. On May 1, 2003
in connection with the Company's 2003 debt restructuring, Mr. Abi Zeid exchanged
a restructured promissory note payable by the Company 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.
On February 4, 2005 Mr. Abi Zeid resigned as an officer and director of the
Company pursuant to a separation agreement. See Note 9.
SALE OF INTERNET DOMAIN NAMES AND REPURCHASE RIGHTS
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. In
August, 2005 the Company entered into a new agreement with the former Chairman
to terminate its right to receive a share of revenues and its option to purchase
back the domain names as provided for in the original sale. See Note 5.
(15) CAPITAL STOCK
AUTHORIZED SHARES
As of December 31, 2005, 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.
57
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.
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.
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, 2005 and 2004, 60,000,000 authorized shares of
undesignated preferred stock were available for creation and issuance in this
manner.
(16) STOCK OPTIONS
The Company has adopted several stock option plans or assumed the plans of
entities it had acquired in prior years. In addition, on June 21, 2005, the
Company adopted the 2005 stock and incentive plan (the "2005 Plan"). All of the
plans terminate 10 years after their respective dates of adoption and provide
for the issuance of incentive stock options and/or non-qualified options.
Options granted under the plans have exercise prices equal to fair market value
at the time of grant and expire upon the earlier of the time period (not to
exceed 10 years after the date of grant) specified in the plan or applicable
option agreement or within the period of time after termination of employment as
specified in the applicable option agreement. Options granted under some of the
plans that are cancelled prior to termination of such plans may be re-granted.
At December 31, 2005, options to purchase 5.2 million shares of Class A common
stock were outstanding and 0.4 million shares were available for future grants
from the prior year plans.
The 2005 Plan provides for the granting of stock options and stock-based awards,
including restricted stock awards, stock units and deferred stock units to
officers, directors, employees and consultants to the Company. The options and
stock-based awards can be made up to a maximum of 1,000,000 shares of the
Company's Class A common stock outstanding at any time. No options or awards
have been granted under the 2005 Plan as of December 31, 2005.
A summary of the Company's stock option activity and weighted average exercise
prices is as follows:
FOR THE YEAR ENDED DECEMBER 31,
------------------------------------------------------------------------------------------
2005 2004 2003
---------------------------- ---------------------------- ----------------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE
------------ ------------ ------------ ------------ ------------ ------------
Options outstanding at
beginning of period ............ 5,092,263 $ 3.80 4,881,980 $ 4.00 2,773,446 $ 6.80
Options granted ................... 957,000 $ 0.96 441,000 $ 1.37 2,470,131 $ 1.14
Options canceled .................. (751,066) $ 3.92 (186,417) $ 3.92 (290,047) $ 7.23
Options exercised ................. (146,062) $ 0.73 (44,300) $ 0.75 (71,550) $ .98
------------ ------------ ------------ ------------ ------------ ------------
Options outstanding at
end of period .................. 5,152,135 $ 3.42 5,092,263 $ 3.80 4,881,980 $ 4.00
============ ============ ============ ============ ============ ============
Options exercisable at period
end ............................ 4,523,525 3,318,729 2,200,787
============ ============ ============
Weighted average fair value
of options granted during
the period ..................... $ 0.80 $ 0.90 $ 0.90
============ ============ ============
58
The following table summarizes information about stock options outstanding and
exercisable at December 31, 2005:
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 - 0.79 ................. 456,400 7.6 $ .58 353,900 $ 0.53
$0.81 - 1.15 ................. 1,526,614 7.4 $ .97 1,070,256 $ 1.00
$1.23 - 1.75 ................. 2,029,837 7.7 $ 1.28 1,960,462 $ 1.28
$1.88 - 2.80 ................. 566,822 5.7 $ 2.16 566,508 $ 2.16
$3.00 - 4.20 ................. 46,203 5.2 $ 3.94 46,140 $ 3.94
$4.80 - 7.19 ................. 30,980 2.2 $ 5.22 30,980 $ 5.22
$7.50 - 10.94 ................ 18,665 1.8 $ 9.71 18,665 $ 9.71
$12.81 - 16.88 ............... 380,819 4.2 $ 15.04 380,819 $ 15.04
$20.00 - 20.00 ............... 8,182 2.0 $ 20.00 8,182 $ 20.00
$32.44 - 35.00 ............... 42,638 2.1 $ 34.99 42,638 $ 34.99
$50.00 - 64.10 ............... 27,359 3.5 $ 51.19 27,359 $ 51.19
$118.60-175.00 ............... 17,616 4.1 $ 155.42 17,616 $ 155.42
------------ ------------ ------------ ------------ ------------
5,152,135 7.0 $ 3.42 4,523,525 $ 3.76
============ ============ ============ ============ ============
(17) EMPLOYEE STOCK AND SAVINGS PLANS
401 (k) PLAN
On January 3, 2000, the Company established a 401(k) Plan ("the plan") for its
U.S. employees. 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 499,617, 273,129 and 531,545 shares of Class A common
stock, for the years ended December 31, 2005, 2004 and 2003 resulted in
compensation expense of $475,000, $400,000, and $492,000, respectively.
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, 2005, 2004 and 2003 amounted to
$295,000, $344,000 and $210,000, respectively.
(18) 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.
The following sets forth the activity in the Company's restructuring reserve (in
thousands):
59
FOR THE YEAR ENDED DECEMBER 31, 2005
--------------------------------------------------------
CURRENT
YEAR CURRENT
BEGINNING PROVISION YEAR ENDING
BALANCE (REVERSAL) UTILIZATION BALANCE
----------- ----------- ----------- -----------
Lease abandonments ............................... $ 903 $ -- $ (731) $ 172
=========== =========== =========== ===========
FOR THE YEAR ENDED DECEMBER 31, 2004
--------------------------------------------------------
CURRENT
YEAR CURRENT
BEGINNING PROVISION YEAR ENDING
BALANCE (REVERSAL) UTILIZATION BALANCE
----------- ----------- ----------- -----------
Lease abandonments ............................... $ 2,747 $ (350) $ (1,494) $ 903
=========== =========== =========== ===========
FOR THE YEAR ENDED DECEMBER 31, 2003
--------------------------------------------------------
CURRENT
YEAR CURRENT
BEGINNING PROVISION YEAR ENDING
BALANCE (REVERSAL) UTILIZATION BALANCE
----------- ----------- ----------- -----------
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
=========== =========== =========== ===========
(19) INCOME TAXES
Income (loss) before provision (credit) for income taxes in 2005 and 2004 is
comprised of the following (in thousands):
2005 2004
---------- ----------
United States .................................... $ (3,478) $ 7,378
Foreign .......................................... 1,436 1,708
---------- ----------
$ 2,042 $ 9,086
========== ==========
The provision (credit) for income taxes in 2005 and 2004 consist of the
following (in thousands):
2005 2004
---------- ----------
(RESTATED)
Current taxes:
Federal .......................................... $ (805) $ 1,735
State ............................................ 35 370
Foreign .......................................... 420 295
---------- ----------
$ (350) $ 2,400
========== ==========
There is no tax provision for 2003 since the Company has incurred losses for tax
purposes in 2003 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, 2005 and 2004
deferred tax assets disclosed below have been adjusted to reflect the Section
382 limitation. As of December 31, 2005 and 2004, the Company had approximately
$8.7 million and $9.2 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 $0.6 million and $2.5 million, respectively, of
foreign net operating loss carryforwards at December 31, 2005 and 2004, which
had no expiration date.
The elimination of outstanding debt in 2003 resulted in substantial income from
cancellation of debt for Federal income tax purposes. The Company minimized 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
60
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 21.
The difference between the statutory federal income tax rate and the Company's
effective tax rate for the years ended December 31, 2005 and 2004 is principally
due to the utilization of federal, state and foreign net operating losses and
foreign taxes. 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, 2005 and 2004 are presented below, in thousands.
2005 2004
---------- ----------
Deferred tax assets
Net operating loss carryforwards ................. $ 4,302 $ 4,416
Allowance for doubtful accounts .................. 1,052 1,345
Tax basis in excess of book basis -- assets and
investments...................................... 108 --
Accrued expenses and restructuring reserve
not currenlty deductible for tax purpose ........ 1,133 562
---------- ----------
6,595 6,323
Deferred tax liabilities
Plant and equipment, differences
in depreciation .............................. (497) 115
Deferred tax gain on domain names
repurchase rights ............................ (400) --
Book basis in excess of tax basis --
assets and investments -- (565)
---------- ----------
(897) (450)
Valuation allowance .............................. (5,698) (5,873)
---------- ----------
Net deferred tax assets and liabilities........... $ 0 $ 0
---------- ----------
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.
(20) VALUATION AND QUALIFYING ACCOUNTS
Additions and write-offs charged to the allowance for doubtful accounts are
presented below, in thousands.
ADDITIONS
BALANCE AT CHARGED TO BALANCE
BEGINNING COSTS AND DEDUCTIONS/ AT END
OF YEAR EXPENSES WRITE-OFFS OF PERIOD
----------- ----------- ----------- -----------
For the year ended December 31, 2003 ............. $ 8,052 $ 1 $ 3,229 $ 4,824
For the year ended December 31, 2004 (restated) .. $ 4,824 $ 450 $ 1,324 $ 3,950
For the year ended December 31, 2005 ............. $ 3,950 $ 59 $ 1,679 $ 2,330
(21) COMMITMENTS AND CONTINGENCIES
MASTER CARRIER AGREEMENT
Under a Master Carrier 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
61
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. In
July, 2005, the Company entered into a new Master Carrier Agreement (the "2005
MCA") for the purchase of all services superceding the previous agreement. Under
the 2005 MCA the Company has a minimum purchase commitment of $5 million over
the two year term of the agreement. The 2005 MCA also contains the same
termination charge of 50% of the unsatisfied purchase commitment.
OTHER TELECOMMUNICATIONS SERVICES
The Company has committed to purchase from Verizon Business (formerly MCI
Worldcom) a minimum of $900,000 per year in other telecommunications services
through March 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
and the broker appealed the decision of the District Court to the United States
Court of Appeals for the Second Circuit. On June 20, 2005, the Court of Appeals
reversed the District Court's ruling that the broker was a third party
beneficiary of the terminated agreement and set aside the $931,000 of damages
awarded against the Company by the District Court. The Court of Appeals also
rejected the broker's claim on appeal for additional damages. The Court of
Appeals, however, also determined that the District Court had not fully resolved
the issue of whether the Company had breached the agreement to sell the portal
operations for the express purpose of avoiding the broker's commission.
Accordingly, the Court of Appeals remanded the case to the District Court for
further consideration. The broker subsequently filed a petition for rehearing
with the Court of Appeals. On July 20, 2005, the Court of Appeals denied the
broker's petition. Briefs and reply briefs were submitted to the District Court
on or before January 27, 2006, and the parties are awaiting the decision of the
District Court on the remand issue. 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. On November 14, 2005, a former Turkish-based
reseller of the Company named Arisegroup and its principals filed what purported
to be a derivative complaint on behalf of a recently formed Turkish entity
against the Company, certain of the
62
Company's current and former directors and officers and Swift Comtext Limited, a
UK subsidiary of the Company, in the Supreme Court of the State of New York,
County of New York. The complaint alleges breach of contract, tortious
interference with contract, unjust enrichment, conversion, misappropriation of
corporate opportunity, breach of fiduciary duties and fraud in the inducement
and makes a claim for an accounting. The complaint seeks relief in the form of,
among other relief, compensatory damages "in an amount in excess of $5,000,000",
punitive damages "in an amount in excess of $10,000,000," pre-judgment interest
and costs. The complaint arises out of the termination of a reseller/sponsorship
arrangement between Arise and the Company and alleges the defendants agreed to
establish and operate a corporation to conduct and expand EasyLink's business in
Turkey and that "plaintiffs" would own 50% of the corporation. As of the date of
filing of this report, the Company and, to the Company's knowledge, the other
defendants have not yet been served. The Company believes that the allegations
against the Company and the individual defendants are without merit. The Company
intends to defend the complaint vigorously and to pursue available remedies for
the filing this complaint.
OTHER
The Company's tax filings may be subject to challenge by various tax
authorities. See Note 19. 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.
(22) QUARTERLY FINANCIAL INFORMATION - UNAUDITED
Condensed Quarterly Consolidated Statements of Operations (in thousands, except
per share data)
YEAR 2005
FIRST QUARTER
----------------------------
AS
REVIOUSLY AS SECOND THIRD FOURTH
PREPORTED RESTATED QUARTER QUARTER QUARTER
------------ ------------ ------------ ------------ ------------
Revenues .......................... $ 20,378 $ 20,378 $ 20,070 $ 19,701 $ 18,510
Cost of revenues .................. 7,714 7,769 6,986 8,169 7,004
------------ ------------ ------------ ------------ ------------
Gross profit ...................... 12,664 12,609 13,084 11,532 11,506
Operating expenses
General and administrative .... 5,650 5,600 4,574 5,206 4,535
Separation agreement costs .... 2,475 2,312
Other expenses ................ 7,346 7,346 7,080 7,195 6,914
------------ ------------ ------------ ------------ ------------
15,471 15,258 11,654 12,401 11,449
------------ ------------ ------------ ------------ ------------
Income (loss) from operations ..... (2,807) (2,649) 1,430 (869) 57
Gain on domain names repurchase
agreement ......................... -- -- -- 1,907 --
Other income(expense), net ........ (148) (277) (374) (759) 100
------------ ------------ ------------ ------------ ------------
Income (loss) before income taxes . (2,955) 2,926) 1,056 279 157
Provision (credit) for income taxes (450) (185) 290 (65) (390)
------------ ------------ ------------ ------------ ------------
Net income (loss) ................. $ (2,505) $ (2,741) $ 766 $ 344 $ 547
============ ============ ============ ============ ============
Basic net income (loss) per share . $ (0.06) $ (0.06) $ 0.02 $ 0.01 $ 0.01
============ ============ ============ ============ ============
Diluted net income per share ...... $ (0.06) $ (0.06) $ 0.02 $ 0.01 $ 0.01
============ ============ ============ ============ ============
63
YEAR 2004
FIRST QUARTER SECOND QUARTER
---------------------------- -----------------------------------------------------------
THREE MONTHS ENDED THREE MONTHS ENDED SIX MONTHS ENDED
---------------------------- ---------------------------- ----------------------------
AS AS AS
REVIOUSLY AS REVIOUSLY AS REVIOUSLY AS
PREPORTED RESTATED PREPORTED RESTATED PREPORTED RESTATED
------------ ------------ ------------ ------------ ------------ ------------
Revenues .......................... $ 24,336 $ 24,336 $ 24,053 $ 24,053 $ 48,390 $ 48,390
Cost of revenues .................. 10,325 9,976 9,764 9,501 20,090 19,477
------------ ------------ ------------ ------------ ------------ ------------
Gross profit ...................... 14,011 14,360 14,289 14,552 28,300 28,913
Operating expenses
General and admin ............. 6,384 6,402 5,681 5,699 12,064 12,101
Other expenses ................ 6,757 6,757 6,914 6,914 13,671 13,671
------------ ------------ ------------ ------------ ------------ ------------
13,141 13,159 12,595 12,613 25,735 25,772
------------ ------------ ------------ ------------ ------------ ------------
Income from operations ............ 870 1,201 1,694 1,939 2,565 3,141
Gain from debt restructuring ...... -- -- -- -- -- --
Other income(expense), net ........ 13 13 (230) (230) (217) (217)
------------ ------------ ------------ ------------ ------------ ------------
Income before income taxes ........ 883 1,214 1,464 1,709 2,348 2,924
Provision for income taxes ........ 30 55 170 160 200 215
------------ ------------ ------------ ------------ ------------ ------------
Net income ........................ $ 853 $ 1,159 $ 1,294 $ 1,549 $ 2,148 $ 2,709
============ ============ ============ ============ ============ ============
Basic net income per share ........ $ 0.02 $ 0.03 $ 0.03 $ 0.04 $ 0.05 $ 0.06
============ ============ ============ ============ ============ ============
Diluted net income per share ...... $ 0.02 $ 0.03 $ 0.03 $ 0.03 $ 0.05 $ 0.06
============ ============ ============ ============ ============ ============
THIRD QUARTER
--------------------------------------------------------
THREE MONTHS ENDED NINE MONTHS ENDED
-------------------------- --------------------------
AS AS
REVIOUSLY AS REVIOUSLY AS
PREPORTED RESTATED PREPORTED RESTATED
----------- ----------- ----------- -----------
Revenues .............................................. $ 22,509 $ 22,509 $ 70,899 $ 70,899
Cost of revenues ...................................... 8,428 8,580 28,518 28,057
----------- ----------- ----------- -----------
Gross profit .......................................... 14,081 13,929 42,381 42,842
----------- ----------- ----------- -----------
Operating expenses
General and admin ................................. 5,959 5,967 18,024 18,069
Other expenses .................................... 2,065 2,065 15,734 15,734
----------- ----------- ----------- -----------
8,024 8,032 33,758 33,803
----------- ----------- ----------- -----------
Income from operations ................................ 6,057 5,897 8,623 9,039
Gain from debt restructuring .......................... -- -- -- --
Other income(expense), net ............................ (16) (16) (234) (234)
----------- ----------- ----------- -----------
Income before income taxes ............................ 6,041 5,881 8,389 8,805
Provision for income taxes ............................ 1,550 1,665 1,750 1,880
----------- ----------- ----------- -----------
Net income ............................................ $ 4,491 $ 4,216 $ 6,639 $ 6,925
=========== =========== =========== ===========
Basic net income per share ............................ $ 0.10 $ 0.10 $ 0.15 $ 0.16
=========== =========== =========== ===========
Diluted net income per share .......................... $ 0.10 $ 0.09 $ 0.15 $ 0.15
=========== =========== =========== ===========
64
FOURTH QUARTER
--------------------------------------------------------
THREE MONTHS ENDED TWELVE MONTHS ENDED
-------------------------- --------------------------
AS AS
REVIOUSLY AS REVIOUSLY AS
PREPORTED RESTATED PREPORTED RESTATED
----------- ----------- ----------- -----------
Revenues ......................................... $ 20,941 $ 20,941 $ 91,840 $ 91,840
Cost of revenues ................................. 8,207 8,071 36,725 36,129
----------- ----------- ----------- -----------
Gross profit ..................................... 12,734 12,870 55,115 55,711
----------- ----------- ----------- -----------
Operating expenses
General and admin ............................ 5,770 5,662 23,794 23,731
Impairment of intangible assets .............. 500 750 500 750
Other expenses ............................... 6,410 6,410 22,144 22,144
----------- ----------- ----------- -----------
12,680 12,822 46,438 46,625
----------- ----------- ----------- -----------
Income from operations ........................... 54 48 8,677 9,086
Other income(expense), net
Interest income .................................. 41 219 70 249
Interest expense ................................. (149) (149) (517) (517)
Gain on debt restructuring ....................... 984 984 984 984
Other, net ....................................... 183 183 288 288
----------- ----------- ----------- -----------
1,059 1,237 825 1,004
----------- ----------- ----------- -----------
Income before income taxes ....................... 1,113 1,285 9,502 10,090
Provision for income taxes ....................... 150 520 1,900 2,400
----------- ----------- ----------- -----------
Net income ....................................... $ 963 $ 765 $ 7,602 $ 7,690
=========== =========== =========== ===========
Basic net income per share ....................... $ 0.02 $ 0.02 $ 0.17 $ 0.17
=========== =========== =========== ===========
Diluted net income per share ..................... $ 0.02 $ 0.02 $ 0.17 $ 0.17
=========== =========== =========== ===========
Due to changes in the number of shares outstanding, quarterly loss per share
amounts do not necessarily add to the totals for the years.
(23) GEOGRAPHIC DISCLOSURE
GEOGRAPHIC INFORMATION
FOR THE YEARS ENDED
--------------------------------------
2005 2004 2003
---------- ---------- ----------
RESTATED
United States:
Revenues .............................................. $ 54,630 $ 67,973 $ 77,019
Operating income (loss) ............................... (3,478) 7,378 (175)
Total assets .......................................... 36,914 43,625 49,408
Long lived assets ..................................... 22,087 22,039 27,585
All other regions:
Revenues .............................................. 24,029 23,867 24,328
Operating income (loss) ............................... 1,436 1,708 (742)
Total assets .......................................... 7,061 6,720 4
Long lived assets ..................................... 641 894 951
Significant country included in all other regions
United Kingdom:
Revenues .............................................. 21,059 20,516 20,463
Operating income (loss) ............................... 1,943 2,296 172
Total assets .......................................... 5,688 5,544 1,176
Long lived assets ..................................... 588 568 541
65
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
Disclosure Controls and Procedures
The Company maintains disclosure controls and procedures designed to ensure that
information required to be disclosed by the Company in the reports that it files
or submits under the Exchange Act is recorded, processed, summarized and
reported within the time periods specified in the Commission's rules and forms.
Disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e)
under the Exchange Act, include controls and procedures designed to ensure that
information required to be disclosed by the company in the reports we file or
submit under the Exchange Act is accumulated and communicated to our Company's
management, including our chief executive officer and chief financial officer,
as appropriate, to allow timely decisions regarding required disclosure. It
should be noted that any system of controls, however well designed and operated,
can provide only reasonable, and not absolute, assurance that the objectives of
the system are met.
As required by Securities and Exchange Commission rules, we have evaluated the
effectiveness of the design and operation of our disclosure controls and
procedures as of the end of the period covered by this annual report. This
evaluation was carried out under the supervision and with the participation of
our management, including our principal executive officer and principal
financial officer. Based on this evaluation, these officers have concluded that,
in light of the material weaknesses described below, as of December 31, 2005,
the Company's disclosure controls and procedures were not effective.
Changes in Internal Control Over Financial Reporting
Since November 2005, we have been implementing the changes in our internal
control over financial reporting described below in this Item 9 to address
certain identified material weaknesses. As a result of the errors described in
Note 2 to the consolidated financial statements included in this report and that
underlie the restatement of our financial statements for the year ended December
31, 2004 and the quarter ended March 31, 2005, the Company identified the
following material weaknesses in its internal control over financial reporting:
1. As of March 31, 2005, the Company did not have the appropriate level of
expertise to properly calculate and review its accounting for income
taxes in its foreign subsidiaries. Specifically, the Company estimated
its UK subsidiaries' UK income tax liability based on information
contained in its statutory reports. These reports incorrectly stated the
amount of net operating losses available to the UK subsidiaries as of
December 31, 2003. The Company did not have the appropriate control
procedures to determine the accuracy of the net operating loss
information contained in the statutory reports. This control deficiency
resulted in the restatement of the Company's consolidated financial
statements at December 31, 2004 and for the year then ended and at March
31, 2005 and for the three months then ended.
2. As of March 31, 2005, the Company did not maintain effective controls
over the accounting for and review of certain accounts because it did
not have adequate personnel with sufficient expertise and adequate
review and reconciliation procedures to correctly account for such
transactions in accordance with generally accepted accounting
principles. These accounts included certain accrued expense liabilities,
fixed assets, accumulated depreciation, currency translation gains and
losses and related costs and expenses. This control deficiency
contributed to the restatement of the Company's consolidated financial
statements at December 31, 2004 and for the year then ended and at March
31, 2005 and for the three months then ended.
66
Remediation Measures for Identified Material Weaknesses
During November, 2005, we made the following changes in our internal control
over financial reporting to remediate the material weaknesses related to the
accounting for foreign income taxes, certain expense liabilities, currency
translation gains and losses, fixed assets, depreciation expense and cost of
revenues:
1. Hired additional accounting personnel in both our domestic and
international finance offices with the appropriate background and
certification.
2. Expanded the existing balance sheet review process by increasing the
accounts and items selected for a more detailed review.
3. Enhanced the levels of review for the quarterly and annual income tax
provision.
We are continuing to monitor and enhance these changes in order to insure that
our disclosure controls and procedures are effective in future periods.
PART III
The information required by Items 10 through 14 in this part is omitted pursuant
to Instruction G of Form 10-K and is incorporated by reference to an amendment
to this Form 10-K to be filed, or in a definitive Proxy Statement filed pursuant
to Regulation 14A, not later than 120 days after December 31, 2005.
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.
2.1+ 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).
2.2+ 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)
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 Thomas Murawski Employment Agreement
10.1.1 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)
67
10.1.2 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)
10.2 Gerald Gorman Employment and Other Agreements
10.2.1 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)
10.2.2 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)
10.2.3 +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)+
10.2.4 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)
10.2.5 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)
10.2.6 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)
10.2.7 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)
10.2.8 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)
10.2.9 +Amendment No. 1 to Domain Portfolio Purchase Agreement
dated August 22, 2005 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 August 26, 2005)+
10.2.10 Secured Promissory Note dated August 22, 2005 issued by NJ
Domains LLC 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
August 26, 2005)
10.2.11 Security Agreement dated August 22, 2005 entered into by NJ
Domains LLC in favor of EasyLink Services Corporation
(Incorporated by reference to Exhibit 10.3 to EasyLink
Services Corporation's Current Report on Form 8-K filed
August 26, 2005)
10.2.12 Guaranty dated August 22, 2005 issued by Gerald Gorman in
favor of EasyLink Services Corporation (Incorporated by
reference to Exhibit 10.4 to EasyLink Services Corporation's
Current Report on Form 8-K filed August 26, 2005)
10.3 George Abi Zeid Employment and Other Agreements
10.3.1 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)
68
10.3.2 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)
10.3.3 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)
10.3.4 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)
10.4 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)
10.5 Employment Agreement between EasyLink Services Corporation and Gary
MacPhee dated August 28, 2002.
10.6 Employment Agreement between EasyLink Services Corporation and Rick
Gooding dated March 26, 2001.
10.7 Employment Agreement between Mail.com, Inc. and David Ambrosia dated
May 19, 1999 (Incorporated by reference to Exhibit 10.6 to Amendment
No. 2 to Form S-1 Registration Statement filed May 25, 1999)
10.8 2005 Executive Incentive Plan (Incorporated by reference to Exhibit
10.1 to EasyLink Services Corporation's Current Report on Form 8-K
filed April 29, 2005)
10.9 2004 Executive Incentive Plan
10.9.1 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)
10.9.2 2004 Executive Incentive Plan - Level 1 International
(applicable to President - International Operations)
(Incorporated by reference to Exhibit 10.9 to EasyLink
Services Corporations Annual Report on Form 10-K filed March
30, 2004)
10.9.3 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)
10.9.4 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)
10.10 Stock Plans
10.10.1 EasyLink Services Corporation 2005 Stock and Incentive Plan
(Incorporated by reference to Appendix A to EasyLink
Services Corporation's Definitive Proxy Statement on
Schedule 14A filed on May 16, 2005)
10.10.2 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)
10.10.3 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)
10.10.4 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)
10.10.5 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)
69
10.10.6 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)
10.10.7 Mail.com, Inc. 1999 Employee Stock Option Plan.
(Incorporated by reference to Exhibit 10.16 to Amendment No.
1 to Form S-1 Registration Statement filed May 4, 1999)
10.10.8 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)
10.10.9 1998 Employee Stock Option Plan. (Incorporated by reference
to Exhibit 10.15 to Amendment No. 1 to Form S-1 Registration
Statement filed May 4, 1999)
10.10.10 1997 Employee Stock Option Plan. (Incorporated by reference
to Exhibit 10.14 to Amendment No. 1 to Form S-1 Registration
Statement filed May 4, 1999)
10.10.11 1996 Employee Stock Option Plan (Incorporated by reference
to Exhibit 10.13 to Amendment No. 1 to Form S-1 Registration
Statement filed May 4, 1999)
10.10.12 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)
10.10.13 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)
10.10.14 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")
10.10.15 1996 Stock Option/Stock Issuance Plan (Incorporated by
reference to Exhibit 10.4 to the NetMoves Registration
Statement)
10.10.16 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)
10.11 Stock Option Agreements
10.11.1 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)
10.11.2 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)
10.11.3 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)
10.11.4 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)
10.11.5 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)
10.11.6 Stock Option Agreement between Mail.com, Inc. and Gerald
Gorman dated December 31, 1996. (Incorporated by reference
to Exhibit 10.10 to Amendment No. 1 to Form S-1 Registration
Statement filed May 4, 1999)
70
10.11.7 Stock Option Agreement between Mail.com, Inc. and Gerald
Gorman dated June 1, 1996. (Incorporated by reference to
Exhibit 10.11 to Amendment No. 1 to Form S-1 Registration
Statement filed May 4, 1999)
10.12 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)
10.13 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)
10.14 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)
10.15 Wells Fargo Foothill, Inc. Credit Agreement
10.15.1 +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)
10.15.2 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)
10.15.3 Second Amendment to Credit Agreement entered into as of July
29, 2005 by and among Wells Fargo Foothill, Inc., EasyLink
Services Corporation, Swift Telecommunications, Inc.,
EasyLink Services USA, Inc., EasyLink Services
International, Inc.
10.15.4 Limited Waiver to Credit Agreement dated as of December 31,
2005 by and among Wells Fargo Foothill, Inc., EasyLink
Services Corporation, Swift Telecommunications, Inc.,
EasyLink Services USA, Inc., EasyLink Services
International, Inc.
10.15.5 Third Amendment to Credit Agreement dated as of February 27,
2006, by and among Easylink Services Corporation, EasyLink
Services USA, Inc. and Wells Fargo Foothill, Inc.
(Incorporated by reference to Exhibit 10.1 of EasyLink
Services Corporation's Current Report on Form 8-K filed
February 28, 2006)
10.15.6 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)
10.15.7 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)
10.15.8 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)
10.15.9 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)
10.15.10 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)
71
10.15.11 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)
10.15.12 +Amendment No. 1 to Pledge Agreement, dated as of July 29,
2005, is made by Easylink Services USA, Inc., a Delaware
corporation (the "Pledgor"), and Wells Fargo Foothill, Inc.,
a California corporation+
10.15.13 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)
10.15.14 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)
10.15.15 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)
10.16 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)
10.17 AT&T Corp. Telecommunications Services Agreements
10.17.1 Amended and Restated Master Carrier Agreement between
EasyLink Services Corporation and AT&T Corp. entered into on
July 21, 2005 (including General Terms & Conditions) ("MCA")
(Incorporated by reference to Exhibit 99.1 to EasyLink
Services Corporation's Current Report on Form 8-K/A filed
August 10, 2005)
10.17.2 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)
10.17.3 AT&T Network Connection Platform Service Description
Attachment (Incorporated by reference to Exhibit 99.2 to
EasyLink Services Corporation's Current Report on Form 8-K/A
filed August 10, 2005)
10.17.4** **AT&T Network Connection Service Terms and Pricing
Attachments entered into on July 21, 2005** (Incorporated by
reference to Exhibit 99.3 to EasyLink Services Corporation's
Current Report on Form 8-K/A filed August 10, 2005)
10.17.5* *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)
10.17.6** **AT&T Service Provider Markets - Service Order Attachment;
AT&T Internet Transport Services entered into on July 21,
2005** (Incorporated by reference to Exhibit 99.4 to
EasyLink Services Corporation's Current Report on Form 8-K/A
filed August 10, 2005)
10.17.7** **AT&T UNIPLAN Service Terms and Pricing Attachment entered
into on July 21, 2005** (Incorporated by reference to
Exhibit 99.5 to EasyLink Services Corporation's Current
Report on Form 8-K/A filed August 10, 2005)
10.17.8* *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)
10.17.9** **AT&T Data Service Terms and Pricing Attachment entered
into on July 21, 2005** (Incorporated by reference to
Exhibit 99.6 to EasyLink Services Corporation's Current
Report on Form 8-K/A filed August 10, 2005)
72
10.17.10 Amendment to Intellectual Property Agreement between AT&T
Corp. and EasyLink Services Corporation entered into on July
21, 2005 (Incorporated by reference to Exhibit 99.7 to
EasyLink Services Corporation's Current Report on Form 8-K/A
filed August 10, 2005)
10.18 Warrants
10.18.1 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)
10.18.2 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)
10.18.3 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)
10.18.4 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)
10.18.6 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)
10.18.7 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)
10.18.8 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)
10.18.9 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 Consents
23.1 Consent of KPMG LLP
23.2 Consent of Grant Thornton LLP
31 Certifications
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
73
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.
** Confidential treatment requested
+ Disclosure schedules and other attachments are omitted, but will be
furnished supplementally to the Commission upon request.
Financial Statement Schedules
None
74
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 March 31, 2006.
EasyLink Services Corporation
(Registrant)
By /s/ THOMAS F. MURAWSKI
--------------------------------------
(Thomas F. Murawski, Chairman,
President and Chief Executive Officer)
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 March 31, 2006.
/s/ THOMAS F. MURAWSKI Chairman, President and Chief
----------------------- Executive Officer, Director
(Thomas F. Murawski) (Principal Executive Officer)
/s/ MICHAEL A. DOYLE Vice President and Chief Financial Officer
----------------------- (Principal Accounting and Financial Officer)
(Michael A. Doyle)
/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)
75
EXHIBIT INDEX
Some of the exhibits referenced below are incorporated by reference to filings
made by EasyLink Services Corporation before the date hereof.
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 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).
2.2+ 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)
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 Thomas Murawski Employment Agreement
10.1.1 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)
10.1.2 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)
10.2 Gerald Gorman Employment and Other Agreements
10.2.1 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)
10.2.2 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)
10.2.3 +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)+
10.2.4 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)
76
10.2.5 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)
10.2.6 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)
10.2.7 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)
10.2.8 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)
10.2.9 +Amendment No. 1 to Domain Portfolio Purchase Agreement
dated August 22, 2005 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 August 26, 2005)+
10.2.10 Secured Promissory Note dated August 22, 2005 issued by NJ
Domains LLC 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
August 26, 2005)
10.2.11 Security Agreement dated August 22, 2005 entered into by NJ
Domains LLC in favor of EasyLink Services Corporation
(Incorporated by reference to Exhibit 10.3 to EasyLink
Services Corporation's Current Report on Form 8-K filed
August 26, 2005)
10.2.12 Guaranty dated August 22, 2005 issued by Gerald Gorman in
favor of EasyLink Services Corporation (Incorporated by
reference to Exhibit 10.4 to EasyLink Services Corporation's
Current Report on Form 8-K filed August 26, 2005)
10.3 George Abi Zeid Employment and Other Agreements
10.3.1 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)
10.3.2 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)
10.3.3 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)
10.3.4 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)
10.4 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)
10.5 Employment Agreement between EasyLink Services Corporation and Gary
MacPhee dated August 28, 2002.
10.6 Employment Agreement between EasyLink Services Corporation and Rick
Gooding dated March 26, 2001.
77
10.7 Employment Agreement between Mail.com, Inc. and David Ambrosia dated
May 19, 1999 (Incorporated by reference to Exhibit 10.6 to Amendment
No. 2 to Form S-1 Registration Statement filed May 25, 1999)
10.8 2005 Executive Incentive Plan (Incorporated by reference to Exhibit
10.1 to EasyLink Services Corporation's Current Report on Form 8-K
filed April 29, 2005)
10.9 2004 Executive Incentive Plan
10.9.1 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)
10.9.2 2004 Executive Incentive Plan - Level 1 International
(applicable to President - International Operations)
(Incorporated by reference to Exhibit 10.9 to EasyLink
Services Corporations Annual Report on Form 10-K filed March
30, 2004)
10.9.3 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)
10.9.4 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)
10.10 Stock Plans
10.10.1 EasyLink Services Corporation 2005 Stock and Incentive Plan
(Incorporated by reference to Appendix A to EasyLink
Services Corporation's Definitive Proxy Statement on
Schedule 14A filed on May 16, 2005)
10.10.2 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)
10.10.3 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)
10.10.4 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)
10.10.5 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)
10.10.6 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)
10.10.7 Mail.com, Inc. 1999 Employee Stock Option Plan.
(Incorporated by reference to Exhibit 10.16 to Amendment No.
1 to Form S-1 Registration Statement filed May 4, 1999)
10.10.8 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)
10.10.9 1998 Employee Stock Option Plan. (Incorporated by reference
to Exhibit 10.15 to Amendment No. 1 to Form S-1 Registration
Statement filed May 4, 1999)
10.10.10 1997 Employee Stock Option Plan. (Incorporated by reference
to Exhibit 10.14 to Amendment No. 1 to Form S-1 Registration
Statement filed May 4, 1999)
10.10.11 1996 Employee Stock Option Plan (Incorporated by reference
to Exhibit 10.13 to Amendment No. 1 to Form S-1 Registration
Statement filed May 4, 1999)
10.10.12 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)
78
10.10.13 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)
10.10.14 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")
10.10.15 1996 Stock Option/Stock Issuance Plan (Incorporated by
reference to Exhibit 10.4 to the NetMoves Registration
Statement)
10.10.16 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)
10.11 Stock Option Agreements
10.11.1 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)
10.11.2 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)
10.11.3 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)
10.11.4 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)
10.11.5 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)
10.11.6 Stock Option Agreement between Mail.com, Inc. and Gerald
Gorman dated December 31, 1996. (Incorporated by reference
to Exhibit 10.10 to Amendment No. 1 to Form S-1 Registration
Statement filed May 4, 1999)
10.11.7 Stock Option Agreement between Mail.com, Inc. and Gerald
Gorman dated June 1, 1996. (Incorporated by reference to
Exhibit 10.11 to Amendment No. 1 to Form S-1 Registration
Statement filed May 4, 1999)
10.12 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)
10.13 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)
10.14 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)
10.15 Wells Fargo Foothill, Inc. Credit Agreement
10.15.1 +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)
79
10.15.2 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)
10.15.3 Second Amendment to Credit Agreement entered into as of July
29, 2005 by and among Wells Fargo Foothill, Inc., EasyLink
Services Corporation, Swift Telecommunications, Inc.,
EasyLink Services USA, Inc., EasyLink Services
International, Inc.
10.15.4 Limited Waiver to Credit Agreement dated as of December 31,
2005 by and among Wells Fargo Foothill, Inc., EasyLink
Services Corporation, Swift Telecommunications, Inc.,
EasyLink Services USA, Inc., EasyLink Services
International, Inc.
10.15.5 Third Amendment to Credit Agreement dated as of February 27,
2006, by and among Easylink Services Corporation, EasyLink
Services USA, Inc. and Wells Fargo Foothill, Inc.
(Incorporated by reference to Exhibit 10.1 of EasyLink
Services Corporation's Current Report on Form 8-K filed
February 28, 2006)
10.15.6 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)
10.15.7 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)
10.15.8 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)
10.15.9 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)
10.15.10 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)
10.15.11 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)
10.15.12 +Amendment No. 1 to Pledge Agreement, dated as of July 29,
2005, is made by Easylink Services USA, Inc., a Delaware
corporation (the "Pledgor"), and Wells Fargo Foothill, Inc.,
a California corporation+
10.15.13 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)
10.15.14 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)
10.15.15 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)
10.16 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)
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10.17 AT&T Corp. Telecommunications Services Agreements
10.17.1 Amended and Restated Master Carrier Agreement between
EasyLink Services Corporation and AT&T Corp. entered into on
July 21, 2005 (including General Terms & Conditions) ("MCA")
(Incorporated by reference to Exhibit 99.1 to EasyLink
Services Corporation's Current Report on Form 8-K/A filed
August 10, 2005)
10.17.2 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)
10.17.3 AT&T Network Connection Platform Service Description
Attachment (Incorporated by reference to Exhibit 99.2 to
EasyLink Services Corporation's Current Report on Form 8-K/A
filed August 10, 2005)
10.17.4** **AT&T Network Connection Service Terms and Pricing
Attachments entered into on July 21, 2005** (Incorporated by
reference to Exhibit 99.3 to EasyLink Services Corporation's
Current Report on Form 8-K/A filed August 10, 2005)
10.17.5* *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)
10.17.6** **AT&T Service Provider Markets - Service Order Attachment;
AT&T Internet Transport Services entered into on July 21,
2005** (Incorporated by reference to Exhibit 99.4 to
EasyLink Services Corporation's Current Report on Form 8-K/A
filed August 10, 2005)
10.17.7** **AT&T UNIPLAN Service Terms and Pricing Attachment entered
into on July 21, 2005** (Incorporated by reference to
Exhibit 99.5 to EasyLink Services Corporation's Current
Report on Form 8-K/A filed August 10, 2005)
10.17.8* *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)
10.17.9** **AT&T Data Service Terms and Pricing Attachment entered
into on July 21, 2005** (Incorporated by reference to
Exhibit 99.6 to EasyLink Services Corporation's Current
Report on Form 8-K/A filed August 10, 2005)
10.17.10 Amendment to Intellectual Property Agreement between AT&T
Corp. and EasyLink Services Corporation entered into on July
21, 2005 (Incorporated by reference to Exhibit 99.7 to
EasyLink Services Corporation's Current Report on Form 8-K/A
filed August 10, 2005)
10.18 Warrants
10.18.1 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)
10.18.2 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)
10.18.3 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)
10.18.4 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
81
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)
10.18.6 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)
10.18.7 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)
10.18.8 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)
10.18.9 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 Consents
23.1 Consent of KPMG LLP
23.2 Consent of Grant Thornton LLP
31 Certifications
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.
** Confidential treatment requested
+ Disclosure schedules and other attachments are omitted, but will be
furnished supplementally to the Commission upon request.
82