Item 1 Business
Company Overview
EasyLink Services Corporation is 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 over 800,000 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 our services to thousands of business customers worldwide including the majority of the Fortune 500. Our strategy is to expand our position in the transaction delivery segment of the electronic commerce market and to begin to offer to our large customer base related transaction management services that automate more components of our customers' business processes.
We believe that growth of the transaction delivery and related transaction management services segment will result from continued strong investment 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. 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, optimizing purchasing practices and reducing waste and overhead costs.
We believe enterprises use EasyLink's transaction delivery 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 information for several of the world's largest insurance companies. 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, people- and paper-intensive methods that are in wide use today. We also currently provide virus protection, unsolicited e-mail or spam control and content filtering services that protect a customer's e-mail system from messages before they enter or leave the corporate network. We derive revenue from license fees, monthly per-user fees, per-message charges, per-page charges, per-minute charges, per-character set charges 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 services provide a broad range of strong capabilities to enterprises, including the ability to:
- - gain access to and use our services through a variety of commonly used enterprise e-commerce application interfaces: SAP, Oracle, PeopleSoft, Web sites, electronic data interchange or EDI systems and others, running on computer systems from mainframe to desktop PC to handheld computer systems;
- - send and receive and transform information using alternative message types: e-mail, EDI, fax, telex, hard copy;
- - connect to our network through the methods in common use today: Internet, dedicated or leased lines, frame relay, virtual private network or VPN and secure dial-up across a phone line;
- - deliver information securely using a variety of security protocols: IP-SEC; SSL, HTTPS, RSA, S/MIME, PGP and non-repudiation/delivery confirmation capabilities. EasyLink plays the role of a trusted third-party in control of a message from transmission to delivery;
- - exchange information with other computer networks using a broad range of communication protocols that computer networks use to exchange information: HTTP, SMTP, TCP/IP, FTP, UNIX/UUCP, Telnet, X.400, IBM proprietary; and
- - exchange information in over 200 document types or formats, including EDI, HTML, XML, PDF, TIFF.
Through the ongoing development and introduction of new transaction delivery and management 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 delivery and other services to a customer base composed primarily of business enterprises. The following chart describes our major service offerings:
We have also begun to offer in international markets email notification, interactive conferencing and interactive voice notification services. We provide these services under EasyLink's brand name through third-party providers.
Revenues
We derive revenues primarily from monthly per-message and usage-based charges for our transaction delivery services; and monthly per-user or per-message fees for virus protection, spam control and content filtering services and license.
Our transaction delivery services generate revenue in a number of different ways. We charge our EDI customers per message. Customers of our production messaging services and transaction management services pay consulting fees based upon the level of integration work and set-up requirements plus per-page or per-minute usage charges, depending on the delivery method, for all messages successfully delivered by our network. Customers who purchase our integrated desktop messaging services pay initial site license fees based on the number of user seats being deployed plus per page usage charges for all faxes successfully delivered by our network.
For our virus protection, spam and content filtering services, we charge customers either a monthly fee per user or per message charges.
Worldwide Sales and Marketing
Our primary marketing objectives are to:
- - promote higher usage of all services in all segments;
- - retain, cross-sell and upsell our existing customer base;
- - grow our 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.
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.
Phone 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, recommend improvements to products, tools, knowledge bases and training. The engineers also develop support preparation plans to enable customer service to efficiently support new products and services.
Technology
EasyLink Transaction Delivery Services Network
The EasyLink transaction delivery services network is a distributed, managed Internet Protocol (IP)-based global network that supports all of our transaction delivery services (EDI and production messaging). The EasyLink Services distributed message network is built upon a combination of highly reliable message switching computer systems dispersed around the world. We strive to operate our message systems operate at 99.5% availability. This high availability ensures continuous reliability for EasyLink Services customer's business critical applications. The message switching systems currently operate with substantial unused computer capacity. This enables EasyLink Services to meet its transaction delivery volume growth objectives without the need for additional capacity investment.
The message switching systems are located at various operational centers in the United States as well as in the United Kingdom. The operational centers are located in major metropolitan centers with easy access to major network providers such as AT&T. This enables EasyLink Services to easily address facility growth. It also allows efficient access to EasyLink Services' major customers and potential markets. All of the EasyLink Services operational centers are secured with continuous power supply. As part of our acquisition of the EasyLink messaging services business, message switches for the transaction delivery network relating to this business are located at an AT&T site. EasyLink Services plans to relocate the message switches to EasyLink Services sites within the next two years.
The EasyLink Services messaging nodes are connected by a managed IP-based backbone. The IP backbone is constantly monitored by EasyLink Services operational centers. This allows for diverse routing and efficient management of volumes so that customers do not experience delays in the routing of messages. If a remote node does experience a problem, messages for many of our services can be re-routed to prevent delays in transaction delivery. EasyLink Services maintains firewalls to prevent unsolicited intrusions from the Internet. Any unauthorized attempt is tracked and investigated. The constant monitoring of the network ensures integrity of all messages within the EasyLink Services network.
EasyLink Services offers its customers a wide range of secure access methods into the EasyLink Services network. Access methods can include X.25, dedicated point-to-point circuits, frame relay, and virtual private networks (VPN). EasyLink Services' operational centers work in conjunction with its customers to ensure the constant availability of access into the network. Any circuit problems are proactively reported by the EasyLink Services' operational centers. EasyLink Services can also offer its customers managed and secure access on a global basis utilizing AT&T's worldwide network access services.
On February 23, 2001, we completed the acquisition of Swift Telecommunications, Inc. and the EasyLink Services business that Swift had just acquired from AT&T Corp. The EasyLink Services business acquired from AT&T provided a variety of transaction delivery services such as EDI and production messaging services. This business was a division of AT&T and was not a separate independent operating entity. We hired only a portion of the employees of the business. Under a Transition Services Agreement, AT&T provided us with a variety of services to enable us to continue to operate the business pending the transition to EasyLink. We have successfully transitioned virtually all of the services provided by AT&T under the Transition Services Agreement to ourselves, including customer service, network operations center, telex switching equipment and services and office space in a variety of locations. The Transition Services Agreement expired on January 31, 2003. The network for the portion of this business relating to EDI and production messaging services continues to reside on AT&T's premises under an Equipment Space Sublease Agreement with AT&T but is now being operated and maintained by EasyLink. The agreement runs through January 31, 2005. We plan to migrate off the AT&T premises to EasyLink's premises over the next two years. Effective February 1, 2003, the Company entered into a Professional Services Agreement with AT&T providing for technical support at the AT&T facility where the Company's EDI and production messaging services network resides. The agreement is for a term of six months but may be renewed for an additional six months at EasyLink's request at the same or reduced level of service.
EasyLink MailWatch (Virus Protection, Spam Control and Content Filtering Services) Network
Hardware Network. The MailWatch service operates on multiprocessor Intel-based servers running Microsoft Windows NT and SQL Server with Raid 5 storage arrays.
Software. MailWatch incorporates third party virus and content filtering technology which we have configured for use in a shared services environment across our customer base. The MailWatch Web-based administrative interface is hosted on servers that utilize Microsoft Windows NT 4.0 and Internet Information Server. The site's pages consist of HTML, Active Server Pages (ASP) and JavaScript.
Network Operations
EasyLink's Network Operations Center or NOC is where network system specialists monitor the status of servers and messaging operations worldwide. An on-site team of engineers staffs the NOC 24x7x365 and uses a combination of third party applications, in combination with our internally developed tools to automate the monitoring and management of the entire system.
The NOC is responsible for the management of infrastructure performance, security and system uptime. RemedySM is used to track all administrative events and subsequently manage performance reports, recovery times and event correlation analysis.
Security - Because organizations are transferring mission-critical messages through the network, EasyLink Services has put in place stringent tools and procedures to address security issues.
Employees - Security is paramount among our employees. All NOC personnel backgrounds are scrutinized and a high proportion of our staff have prior experience in secure environments. Personnel go through continual training to stay on top of the latest security related issues and technologies.
Technologies - Proxy Based Firewall - This level of intervention means that the content of the data is scrutinized, allowing data to pass if it matches the more sophisticated rule base. SSL (Secure Sockets Layer) - Provides data encryption, server authentication, message integrity, and client authentication.
Access Control - Authorized personnel must access to and from secured areas through a specially designed single entry monitored door. Specific security protocols such as monitors, security badges and passcodes are in place and enhanced with advancement in security technology.
Environmental - Fire protection - Robust fire sensory components are placed strategically throughout the Network Operations Center. Back-up - The entire NOC system is protected with back up battery power in case of utility power failure.
Climate control - EasyLink Services has put in place state-of-the-art cooling, heating and humidity controls to keep the entire infrastructure operating at optimum conditions.
Telecommunications Services
In connection with the acquisition of the EasyLink Services business from AT&T Corp., we entered into a Master Carrier Agreement with AT&T. Under this agreement, AT&T will provide us with a variety of telecommunications services that are required in connection with the provision of our services. The term of the agreement for network connection services is for 36 months through May 2005 and the term of the agreement for private line and satellite services is 36 months through February 2004. Under the agreement, we have a minimum purchase commitment for network connection services equal to $3 million for each of the three years of the contract. In addition, we have a minimum purchase commitment for private line and satellite services equal to $375,000 per month during the three-year term. If we terminate the network connection services or the private line and satellite services prior to the end of the term or AT&T terminates the services for our breach, we 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.
The Company has committed to purchase from MCI Worldcom a minimum of $75,000 per month in other telecommunications services through January 2005.
Competition
Depending on the particular service that we offer, we compete with a range of companies in the transaction delivery services and messaging market, 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 sector varies. Competitors in the EDI and Trading Community Enablement Services markets include Inovis, Internet Commerce Corp., GXS, IBM Interchange Services and Sterling Commerce, Inc., a subsidiary of SBC Communications Inc. Our competitors in the integrated desktop messaging and production messaging markets include telecommunications companies around the world, such as MCI WorldCom, British Telecom PLC, France Telecom, Deutsche Telekom, KDD in Japan, Korea Telecom, Singapore Telecom, the regional Bell operating companies, telecommunications resellers, and direct transaction delivery service delivery competitors, including PTEK Holdings Inc.'s Xpedite Services and J2 Global Communications. 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 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 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 faxMailer service.
As part of a settlement entered into in September 1998, NetMoves Corporation, which we acquired in February 2000, received a perpetual license from AudioFAX IP, L.L.P. to use certain of AudioFAX's patents relating to store-and-forward technology. The license is fully paid-up.
From time to time, third parties have asserted claims against us that our services employ technology covered by their patents. There can be no assurance that third parties will not assert additional infringement claims against us in the future. Patents have been granted recently on fundamental technologies in the communications and desktop software areas, and patents may be issued which relate to fundamental technologies incorporated into our services. As patent applications in the United States are not publicly disclosed until the patent is issued, applications may have been filed which, if issued as patents, could relate to our services. It is also possible that claims could be asserted against us because of the sending of messages over our network or the content of these messages. We could incur substantial costs and diversion of management resources with respect to the defense of any claims that we have infringed upon the proprietary right of others, which costs and diversion could have a material adverse effect on our business, financial condition and results of operations. Furthermore, parties making such claims could secure a judgment awarding substantial damages, as well as injunctive or other equitable relief which could effectively block our ability to license and sell our services in the United States or abroad. Any such judgment could have a material adverse effect on our business, financial condition and results of operations. In the event a claim relating to proprietary technology or information is asserted against us, we may seek licenses to such intellectual property. There can be no assurance, however, that licenses could be obtained on terms acceptable to us, or at all. The failure to obtain any necessary licenses or other rights could have a material adverse effect on our business, financial condition and results of operations.
We incorporate licensed, third-party technology in our services. In these license agreements, the licensors have generally agreed to defend, indemnify and hold us harmless with respect to any claim by a third party that the licensed software infringes any patent or other proprietary right. The outcome of any litigation between these licensors and a third party or between us and a third party may lead to our having to pay royalties for which we are not indemnified or for which such indemnification is insufficient, or we may not be able to obtain additional licenses on commercially reasonable terms, if at all. In the future, we may seek to license additional technology to incorporate in our services. The loss of or inability to obtain or maintain any necessary technology licenses could result in delays in introduction of new services or curtailment of existing services, which could have a material adverse effect on our business, results of operations and financial condition.
To the extent that we license any of our content from third parties, our exposure to copyright infringement actions may increase because we must rely upon these third parties for information as to the origin and ownership of the licensed content. We generally obtain representations as to the origins and ownership of any licensed content and indemnification to cover breaches of any representations. However, such representations may be inaccurate or any indemnification may be insufficient to provide adequate compensation for any breach of these representations.
Government Regulation
There are currently few laws or regulations that specifically regulate activity on the Internet. However, laws and regulations may be adopted in the future that address issues such as user privacy, pricing, and the characteristics and quality of products and services. For example, the Telecommunications Act of 1996 restricts the types of information and content transmitted over the Internet. Several telecommunications companies have petitioned the FCC to regulate ISPs and online service providers in a manner similar to long distance telephone carriers and to impose access fees on these companies. This could increase the cost of transmitting data over the Internet. Any new laws or regulations relating to the Internet could adversely affect our business.
We are subject to regulation by various state public service and public utility commissions and by various international regulatory authorities with respect to our fax services. We are licensed by the FCC as an authorized telecommunications company and are classified as a "non-dominant interexchange carrier." Generally, the FCC has chosen not to exercise its statutory power to closely regulate the charges or practices of non-dominant carriers. Nevertheless, the FCC acts upon complaints against such carriers for failure to comply with statutory obligations or with the FCC's rules, regulations and policies. The FCC also has the power to impose more stringent regulatory requirements on us and to change its regulatory classification. There can be no assurance that the FCC will not change its regulatory classification or otherwise subject us to more burdensome regulatory requirements.
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 facsimile nodes continues. There can be no assurance that we will be able to satisfy the regulatory requirements in each of the countries currently targeted for node deployment, and the failure to satisfy such requirements may prevent us from installing Internet-capable facsimile nodes in such countries. The failure to deploy a number of such nodes could have a material adverse effect on its business, operating results and financial condition.
Our facsimile nodes and our faxLauncher service utilize encryption technology in connection with the routing of customer documents through the Internet. 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 Cuba, Iran, Iraq, Libya, North Korea, and Rwanda. 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 which could result in severe limits to our ability to conduct business in these countries and this could have a material adverse effect on our financial position, results of operations and cash flows. We have also announced that we intend to expand our business in international markets. To the extent that we offer our services in foreign countries, we will be subject to the laws and regulations of these countries. The laws and regulations relating to the Internet in many countries are evolving and in many cases are unclear as to their application. 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 Employees
As of February 28, 2003, we had approximately 600 employees. Of these personnel, 161 persons worked in technology, product management, professional services, telex settlements and customer service; 177 persons worked in sales, marketing and business development; and 262 persons worked in operations and administration. Approximately 400 employees are domestic employees and approximately 200 are international employees. We have never had a work stoppage and no personnel are represented under collective bargaining agreements. We consider our employee relations to be good.
We believe that our future success will depend in part on our continued ability to attract, integrate, retain and motivate highly qualified sales, technical, and managerial personnel, and upon the continued service of our senior management and key sales and technical personnel. To help us retain our personnel, some of our full-time employees have received stock option grants. None of our personnel are bound by employment agreements that prevent them from terminating their relationship at any time for any reason.
Competition for qualified personnel is intense, and we may not be successful in attracting, integrating, retaining and motivating a sufficient number of qualified personnel to conduct our business in the future.
RISK FACTORS THAT MAY AFFECT FUTURE RESULTS
We have only a limited operating history and some of our services are in a new and unproven industry.
We have only a limited operating history upon which you can evaluate our business and our prospects. Easylink was incorporated under the name Globecomm, Inc. in 1994 in the State of Delaware. We launched our business by offering a commercial email service in November 1996 under the name iName. We changed our company name to Mail.com, Inc. in January 1999. In February 2000, we acquired NetMoves Corporation, a provider of a variety of transaction delivery services to businesses. In March 2000, we formed WORLD.com to develop and operate our domain name properties as independent Web sites. In the fourth quarter of 2000, we announced our intention to focus exclusively on the business market and to sell all assets not related to this business. In February 2001, we acquired Swift Telecommunications, Inc. which had contemporaneously acquired the EasyLink Services business from AT&T Corp. The EasyLink Services business is a provider of transaction delivery services such as electronic data interchange or EDI and production messaging services. Swift was a provider of production messaging services, principally telex services. On March 30, 2001, we announced that we had sold our advertising network business to Net2Phone, Inc. and on May 3, 2001 our Asia.com, Inc. subsidiary completed the sale of its business. In October 2001, we sold a subsidiary of India.com, Inc. and have since ceased the conduct of the portal operations of India.com, Inc. In January 2002, we announced our strategy to expand our position in the transaction delivery segment of the electronic commerce market and to begin to offer to our large customer base related transaction management services that automate more components of our customers' business processes. In 2002 we commercially introduced two such services - Trading Community Enablement and Management Services and Document Capture and Management Services. Our success will depend in part upon our ability to maintain or expand our sales of transaction delivery services such as EDI, production messaging and integrated desktop messaging to enterprises, our ability to successfully develop transaction management services, the development of a viable market for fee-based transaction delivery and transaction management services on an outsourced basis and our ability to compete successfully in those markets. For the reasons discussed in more detail below, there are substantial obstacles to our achieving and sustaining profitability.
We have incurred losses since inception.
We have not achieved profitability in any period, and we may not be able to achieve or sustain profitability. We incurred a net loss of $85.8 million for the year ended December 31, 2002. We had an accumulated deficit of $599.3 million as of December 31, 2002. We intend to upgrade and enhance our technology, continue our international expansion, and improve and expand our management information and other internal systems. We intend to continue to make strategic acquisitions and investments where resources permit, which may result in significant amortization of intangibles and other expenses or a later impairment charge arising out of the write-off of goodwill booked as a result of such acquisitions or investments. We are making these expenditures in anticipation of higher revenues, but there will be a delay in realizing higher revenues even if we are successful. We have experienced declining revenues for the year ended December 31, 2002 as compared to the comparable period ended December 31, 2001. See Part II, Item 7: Management's Discussion and Analysis of Financial Condition and Results of Operations. If we do not succeed in substantially increasing our revenues or integrating the EasyLink Services and Swift businesses with our historical business, our losses may continue.
If we are unable to raise necessary capital in the future, we may be unable to invest in the growth of our business or fund necessary expenditures.
We may need to raise additional capital in the future. See Part II. Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources. At December 31, 2002, we had $9.6 million of cash, cash equivalents and marketable securities. Our principal commitments consist of subordinated convertible notes, senior convertible notes, notes payable, obligations under capital leases, accounts payable and other current obligations, commitments for capital expenditures and commitments for telecommunications services. For each of the three years ended December 31, 2002, 2001 and 2000, we received a report from our independent accountants containing an explanatory paragraph stating that we suffered recurring losses from operations since inception and have a working capital deficiency that raise substantial doubt about our ability to continue as a going concern. We may need additional financing to invest in the growth of our business and to pay other obligations, and the availability of such financing when needed, on terms acceptable to us, or at all, is uncertain. See "Risk Factors - We have incurred significant indebtedness for money borrowed, and we may be unable to pay debt service on this indebtedness." If we are unable to raise additional financing, generate sufficient cash flow, or restructure our debt obligations before they become due and payable, we may be unable to continue as a going concern.
If we raise additional funds by issuing equity securities or debt convertible into equity securities, stockholders may experience significant dilution of their ownership interest. The amount of dilution resulting from issuance of additional shares of Class A common stock and securities convertible into Class A common stock and the potential dilution that may result from future issuances has significantly increased in light of the decline in our stock price. Moreover, we could issue preferred stock that has rights senior to those of the Class A common stock. Some of our stockholders have registration rights that could interfere with our ability to raise needed capital. If we raise funds by issuing debt, our lenders may place limitations on our operations, including our ability to pay dividends.
We have incurred significant indebtedness for money borrowed, and we may be unable to pay debt service on this indebtedness.
As of December 31, 2002, we had approximately $87.8 million principal amount of outstanding indebtedness for borrowed money, including approximately $11.7 million of capitalized future interest, and capital leases. We had an operating loss and negative cash flow for the year ended December 31, 2002. In addition, we have a substantial amount of outstanding accounts payable and other obligations. Accordingly, cash generated by our operations would have been insufficient to pay the amount of interest payable annually on our outstanding indebtedness or to pay our other obligations.
We recently announced that we are seeking to eliminate substantially all of our indebtedness for borrowed money. Pursuant to these efforts, we have eliminated approximately $7.1 million principal amount of debt after December 31, 2002 through the date hereof in exchange for the payment of approximately $0.8 million in cash and the issuance or commitment to issue approximately 1.1 million shares of our Class A common stock. These transactions will result in a gain of approximately $6.6 million which will be recorded in the first quarter of 2003. As a result of this transaction, the Company also eliminated $0.7 million of capitalized interest and $0.2 million of accrued interest associated with the debt eliminated. We may issue additional shares or securities convertible into or exercisable for shares of Class A common stock in connection with raising any capital needed to fund cash payments for any additional debt that we may eliminate. Upon elimination of any additional indebtedness, we would also eliminate the capitalized interest and accrued interest associated with the debt eliminated. Holders of substantially all indebtedness on which we currently owe accrued but unpaid interest payments have agreed to defer such payments pending completion of our proposed debt restructuring in most cases until April 30, 2003 or May 31, 2003.
We cannot assure you that we will be able to successfully complete the elimination of any other indebtedness that we are seeking to eliminate on favorable terms or at all. On February 27, PTEK Holdings, Inc., one of our principal competitors, announced that it had entered into an agreement with AT&T to purchase 1,423,980 shares of outstanding Class A common stock of EasyLink held by AT&T and a promissory note of EasyLink held by AT&T. The promissory note, with a principal amount of $10 million, represents approximately 13% of the aggregate principal amount of debt that EasyLink has been seeking to eliminate pursuant to its debt restructuring plan. In response to PTEK's announcement, we commenced on March 17, 2003 an action against AT&T Corp., PTEK Holdings, Inc. and PTEK's subsidiary Xpedite Systems, Inc. The suit seeks, among other things, to enjoin AT&T from selling the EasyLink promissory note held by AT&T to PTEK, to compel AT&T to participate in EasyLink's current debt restructuring and to enjoin Xpedite and PTEK from contacting EasyLink's creditors and making false statements to EasyLink's customers and creditors regarding EasyLink and its financial position. EasyLink believes that if the sale of the note to PTEK is permitted to occur, EasyLink's current debt restructuring may be at substantial risk. Easylink has a variety of commercial relationships with AT&T, and this dispute may have an adverse effect on these relationships.
If we are unable to complete the elimination of debt pursuant to our proposed debt restructuring on favorable terms, we cannot assure you that we will be able to pay interest and other amounts due on our outstanding indebtedness, or our other obligations, on the scheduled dates or at all. If our cash flow and cash balances are inadequate to meet our obligations, we could face substantial liquidity problems. If we are unable to generate sufficient cash flow or otherwise obtain funds necessary to make required payments, or if we otherwise fail to comply with any covenants in our indebtedness, we would be in default under these obligations, which would permit these lenders to accelerate the maturity of the obligations and could cause defaults under our indebtedness. Any such default could have a material adverse effect on our business, results of operations and financial condition. We cannot assure you that we would be able to repay amounts due on our indebtedness if payment of the indebtedness were accelerated following the occurrence of an event of default under, or certain other events specified in, the agreements governing our outstanding indebtedness and capital leases, including any deemed sale of all or substantially all of our assets.
The elimination of outstanding debt pursuant to our debt restructuring strategy will result in substantial cancellation of debt income for tax purposes. We intend to offset this income using our historical net operating losses and as result do not expect to incur any material current tax liability as a result of the elimination of this debt. The relevant tax authorities may take the position that our historical net operating losses cannot be used to offset some or all of the cancellation of debt income. No assurance can be given that we will be able to offset all or any of the cancellation of debt income resulting from the elimination of debt pursuant to our debt restructuring. If we are not able to offset this income, we may incur material 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 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. For example, we acquired NetMoves Corporation, a provider of production messaging services and integrated desktop messaging services to businesses, and The Allegro Group, Inc., a provider of email and email related services, such as virus blocking and content screening, to businesses. We also acquired Swift Telecommunications, Inc. and the EasyLink Services business that it had contemporaneously acquired from AT&T Corp. We will continue our efforts to acquire or make strategic investments in businesses and to acquire or license technology and other assets, and any of these acquisitions may be material to us. We cannot assure you that acquisition or licensing opportunities will continue to be available on terms acceptable to us or at all. Such acquisitions involve risks, including:
- - inability to raise the required capital;
- - difficulty in assimilating the acquired operations and personnel;
- - inability to retain any acquired member or customer accounts;
- - disruption of our ongoing business;
- - the need for additional capital to fund losses of acquired businesses;
- - inability to successfully incorporate acquired technology into our service offerings and maintain uniform standards, controls, procedures and policies; and
- - lack of the necessary experience to enter new markets.
We may not successfully overcome problems encountered in connection with potential acquisitions. In addition, an acquisition could materially impair our operating results by diluting our stockholders' equity, causing us to incur additional debt or requiring us to amortize acquisition expenses and acquired assets or to incur impairment charges as a result of the write-off of goodwill booked as a result of such acquisition.
We may be unable to successfully complete the migration of the network relating to our business acquired from AT&T off of AT&T premises.
On February 23, 2001, we completed the acquisition of Swift Telecommunications, Inc. which had contemporaneously acquired the EasyLink Services business of AT&T Corp. The EasyLink Services business acquired from AT&T provides a variety of transaction delivery services. This business was a division of AT&T and was not a separate independent operating entity. We hired only a portion of the employees of the business.
Under a Transition Services Agreement entered into in connection with the acquisition, AT&T agreed to provide us with a variety of services to enable us to continue to operate the business pending the transition to EasyLink. We have successfully transitioned virtually all of these services provided by AT&T under the Transition Services Agreement to ourselves, including customer service, network operations center, telex switching equipment and services and office space in a variety of locations. However, the network for the portion of this business relating to EDI, fax and email services continues to reside on AT&T's premises, but is being operated and maintained by EasyLink. We plan to migrate our network off of AT&T's premises to EasyLink's premises over the next two years.
We cannot assure you that we will be able to successfully migrate the remaining EasyLink Services network from AT&T's premises to our own premises, or successfully integrate them into our operations, in a timely manner or without incurring substantial unforeseen expense or without service interruption to our customers. Even if successfully migrated, we may be unable to operate the business at expense levels that are ultimately profitable for us. We cannot assure you that we will be able to retain all of the customers of the EasyLink Services business. Our inability to successfully migrate, integrate or operate the network and operations, or to retain customers, of the EasyLink Services business will result in a material adverse effect on our business, results of operations and financial condition.
Outsourcing of transaction delivery and transaction management services may not prove to be viable businesses.
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 continued expansion of the market for outsourced transaction delivery services such as EDI, production messaging services and integrated desktop messaging services and the development of viable markets for the outsourcing of additional transaction delivery services and new transaction management services. Each of these developments is somewhat speculative.
There are significant obstacles to the full development of a sizable market for the outsourcing of transaction delivery and 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 the Internet, however, are likely to be of concern to enterprises and service providers deciding whether to outsource their transaction delivery and 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 the disposition of our remaining non-core assets, and write-downs of impaired assets;
- - increases or decreases in the number of transactions generated by our customers (such as insurance claims, trade and travel confirmations, purchase orders, invoices, shipping notices, funds transfers, among others), which is affected by factors that affect specific customers, the respective industries in which our customers conduct business and the economy generally;
- - non-cash charges associated with repriced stock options, if our stock price rises above $16.90;
- - 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.
Other such factors in our non-core assets include:
- - incurrence of additional expenditures without receipt of offsetting revenues pending the sale of these assets.
We may incur significant stock based compensation charges related to repriced options if our stock price rises above $16.90.
In light of the decline in our stock price and in an effort to retain our employee base, on November 14, 2000, the Company offered to certain of its employees, officers and directors, other than Gerald Gorman, the right to reprice certain outstanding stock options to an exercise price equal to $16.90 per share, the closing price of the Company's Class A common stock on Nasdaq on November 14, 2000 as adjusted for our reverse stock split effected on January 23, 2002. Options to purchase 632,799 shares were repriced. The repriced options vest at the same rate that they would have vested under their original terms. In March 2000, Financial Accounting Standards Board ("FASB") issued FASB Interpretation No. 44, "Accounting for Certain Transactions Involving Stock Compensation, an interpretation of APB Opinion No. 25" ("Interpretation"). Among other issues, this Interpretation clarifies (a) the definition of employee for purposes of applying Opinion 25, (b) the criteria for determining whether a plan qualifies as a noncompensatory plan, (c) the accounting consequence of various modifications to the terms of a previously fixed stock option or award, and (d) the accounting for an exchange of stock compensation awards in a business combination. As a result, under the Interpretation, stock options repriced after December 15, 1998 are subject to variable plan accounting treatment. This guidance requires the Company to remeasure compensation cost for outstanding repriced options each reporting period based on changes in the market value of the underlying common stock. If our stock price rises above the $16.90 exercise price of the repriced options, this accounting treatment may result in significant non-cash compensation charges in future periods.
Several of our competitors have substantially greater resources, longer operating histories, larger customer bases and broader product offerings.
Our business is, and we believe will continue to be, intensely competitive. See "Part I Item 1 - Business - Competition" in this Form 10-K and subsequent reports filed with the Securities and Exchange Commission.
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.
We have aggressively expanded our operations in anticipation of continued growth in our business and as a result of our acquisitions. We have also developed the technology and infrastructure to offer a range of services in our target market. This expansion has placed, and we expect it to continue to place, a significant strain on our managerial, operational and financial resources. If we cannot manage our growth effectively, our business, operating results and financial condition will suffer.
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 Gerald Gorman, our Chairman, Thomas Murawski, our President and Chief Executive Officer, George Abi Zeid, our President-International Operations, and Debra McClister, our Executive Vice President and Chief Financial Officer. The loss of the services of Messrs. Gorman, Murawski or Abi Zeid or of Ms. McClister, or several other key employees, would impede the operation and growth of our business.
To manage our existing business and handle any future growth, we will have to attract, retain and motivate additional highly skilled employees. In particular, we will need to hire and retain qualified sales people if we are to meet our sales goals. We will also need to hire and retain additional experienced and skilled technical personnel in order to meet the increasing technical demands of our expanding business. Competition for employees in messaging-related businesses is intense. We have in the past experienced, and expect to continue to experience, difficulty in hiring and retaining employees with appropriate qualifications. If we are unable to do so, our management may not be able to effectively manage our business, exploit opportunities and respond to competitive challenges.
Our business is heavily dependent on technology, including technology that has not yet been proven reliable at high traffic levels and technology that we do not control.
The performance of our computer systems is critical to the quality of service we are able to provide to our customers. If our services are unavailable or fail to perform to their satisfaction, they 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 monetary damages.
We may need to upgrade 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 Manhattan, Jersey City, New Jersey, Piscataway, New Jersey, Washington, DC, Bridgeton, Missouri and Dayton, Ohio. We currently do not have alternate sites from which we could conduct these operations in the event of a disaster. Our computer and communications hardware is vulnerable to damage or interruption from fire, flood, earthquake, power loss, telecommunications failure and similar events. Our services would be suspended for a significant period of time if any of our primary data centers was severely damaged or destroyed. We might also lose customer transaction documents and other customer files, causing significant customer dissatisfaction and possibly giving rise to claims for monetary damages. As a result of the recent relocation of our corporate headquarters during the first quarter of 2003, we plan to consolidate over time an increasing portion of our computer systems and networks at the new location. 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 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 and to use instead those of our competitors.
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, stored email or other personal or business information. Our customers or their employees 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 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, 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.
We are dependent on licensed technology.
We license a significant amount of technology from third parties, including technology related to our virus protection, spam control and content filtering services, Internet fax services, billing processes and database. We anticipate that we will need to license additional technology to remain competitive. We may not be able to license these technologies on commercially reasonable terms or at all. Third-party licenses 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 costs, and the possible termination of or failure to renew an important license by the third-party licensor.
If the Internet and other third-party networks on which we depend to deliver our services become ineffective as a means of transmitting data, the benefits of our service may be severely undermined.
Our business depends on the effectiveness of the Internet as a means of transmitting data. The recent growth in the use of the Internet has caused frequent interruptions and delays in accessing and transmitting data over the Internet. Any deterioration in the performance of the Internet as a whole could undermine the benefits of our services. Therefore, our success depends on improvements being made to the entire Internet infrastructure to alleviate overloading and congestion. We also depend on telecommunications network suppliers such as AT&T Corp. and Worldcom 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 Integrate the EasyLink Services Business Acquired From AT&T" above, "Item 1. Business - Technology" in this Form 10-K and subsequent filings with the Securities and Exchange Commission.
Gerald Gorman and George Abi Zeid collectively held as of February 28, 2003 approximately 48.4% of the total outstanding voting power of EasyLink and will be able to prevent a change of control.
Gerald Gorman, our Chairman, held as of February 28, 2003 Class A and Class B common stock representing approximately 38.8% of the voting power of our outstanding common stock. Each share of Class B common stock entitles the holder to 10 votes on any matter submitted to the stockholders. George Abi Zeid, our President-International Operations and Director, beneficially owned as of February 28, 2003 Class A common stock representing approximately 9.6% of the voting power of our outstanding common stock and, after giving effect to the issuance of shares issuable upon conversion or exercise of convertible securities and warrants held by Mr. Abi Zeid, approximately 11.4% of such voting power. Based on their voting power as of February 28, 2003, Mr. Gorman and Mr. Abi Zeid will likely be able to determine the outcome of all matters requiring stockholder approval, including the election of directors, amendment of our charter and approval of significant corporate transactions. Mr. Gorman and Mr. Abi Zeid will be in a position to prevent a change in control of EasyLink even if the other stockholders were in favor of the transaction.
We have agreed to permit Federal Partners, L.P., a holder of our senior convertible notes and Class A common stock, to designate one member of our board of directors. In addition, in connection with the acquisition of Swift Telecommunications, Inc., we agreed to appoint George Abi Zeid, the former sole shareholder of Swift, as a director and as our President of International Operations.
Our charter contains provisions that could deter or make more expensive a takeover of EasyLink. These provisions include the ability to issue "blank check" preferred stock without stockholder approval.
Our goal of building brand identity is likely to be difficult and expensive.
We announced on April 2, 2001 that we have changed our corporate name to EasyLink Services Corporation to more accurately reflect the strengths, relationships and solutions that we offer. We believe that a quality brand identity will be essential if we are to develop our business services market. If our marketing efforts cost more than anticipated or if we cannot increase our brand awareness, our losses will increase and our ability to succeed will be seriously impeded.
Our expansion into international markets is subject to significant risks and our losses may increase and our operating results may suffer if our revenues from international operations do not exceed the costs of those operations.
We intend to continue to expand into international markets and to expend significant financial and managerial resources to do so. We may not be able to compete effectively in international markets. If our revenues from international operations do not exceed the expense of establishing and maintaining these operations, our losses will increase and 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;
- - political instability, unexpected changes in regulatory requirements, and reduced protection for intellectual property rights in some countries;
- - export restrictions, 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.
There are currently few laws or regulations that specifically regulate activity on the Internet. However, laws and regulations may be adopted in the future that address issues such as user privacy, pricing, and the characteristics and quality of products and services. For example, the Telecommunications Act of 1996 restricts the types of information and content transmitted over the Internet. Several telecommunications companies have petitioned the FCC to regulate ISPs and online service providers in a manner similar to long distance telephone carriers and to impose access fees on these companies. This could increase the cost of transmitting data over the Internet. Any new laws or regulations relating to the Internet could adversely affect our business.
Moreover, the extent to which existing laws relating to issues such as property ownership, pornography, libel and personal privacy are applicable to the Internet is uncertain. We could face liability for defamation, copyright, patent or trademark infringement and other claims based on the content of messages transmitted over our system. We may also face liability for unsolicited commercial and other email and fax messages sent by users of our services. We do not and cannot screen all the content generated and received by users of our services. Some foreign governments, such as Germany, have enforced laws and regulations related to content distributed over the Internet that are more strict than those currently in place in the United States.
A majority of our services are currently classified by the FCC as "information services," and therefore are exempt from public utility regulation. To the extent that we are permitted to offer all of our services as a single "bundle of interrelated products," then the whole bundle is currently exempt from regulation as a "hybrid service." If considered independent of the bundle, however, our fax-to-fax services, when conducted over circuit-switched network lines, and our telex services, qualify as "telecommunications services," and would thus be subject to federal regulation. Moreover, while the FCC has until now exercised forbearance in regulating IP communications, it has indicated that it might regulate certain IP communications as "telecommunications services" in the future. There can be no assurance that the FCC will not change its regulatory classification system and thereby subject us to unexpected and burdensome additional regulation. In addition, a variety of states regulate certain of our services when provided on an intrastate basis.
We obtained authorizations from the FCC to provide such telecommunications services in conjunction with our acquisition of these telecommunications services from NetMoves, and are classified as a "non-dominant interexchange carrier." While the FCC has generally chosen not to exercise its statutory power to closely regulate the charges or practices of non-dominant carriers, it will act upon complaints against such carriers for failure to comply with statutory obligations or with the FCC's rules, regulations and policies - to the extent that such services are, in the FCC's view, subject to regulation.
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 in operations.
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 the countries currently targeted for node deployment, and the failure to satisfy such requirements may prevent us from installing Internet-capable fax nodes in such countries. 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 our faxLauncher service utilize encryption technology in connection with the routing of customer documents through the Internet. 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 Cuba, Iran, Iraq, Libya, North Korea, and Rwanda. 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 which could result in severe limits to our ability to conduct business in these countries. To the extent that we develop or offer messaging services in foreign countries, we will be subject to the laws and regulations of these countries. The laws and regulations relating to the Internet in many countries are evolving and in many cases are unclear as to their application. For example, in India, the PRC and other countries we may be subject to licensing requirements with respect to the activities in which we propose to engage and we may also be subject to foreign ownership limitations or other approval requirements that preclude our ownership interests or limit our ownership interests to up to 49% of the entities through which we propose to conduct any regulated activities. If these limitations apply to our activities, including our 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. Third parties have challenged our rights to use some of our domain names, and we expect that they will continue to do so, which may affect the value that we can derive from the planned disposition of the domain names included among our non-core assets.
The status of United States patent protection for software products is not well defined and will evolve as additional patents are granted. If we apply for a patent in the future, we do not know if our application will be issued with the scope of the claims we seek, if 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. Third parties have challenged our rights to register and use some of our domain names based on trademark principles and on the Anticybersquatting Consumer Protection Act. If domain names become more valuable to businesses and other persons, we expect that third parties will continue to challenge some of our domain names and that the number of these challenges may increase. In addition, the existing or future laws of some countries, in particular countries in Europe, may limit or prohibit the use in those countries or elsewhere of some of our geographic names that contain the names of a city in those countries or the name of those countries. Intellectual property litigation is expensive and time-consuming and could divert management's attention away from running our business. These claims and the potential for such claims may reduce the value that we can expect to receive from the disposition of our domain names.
In connection with the sale of our consumer-based email and advertising network business, we transferred to the buyer the rights to direct the "MX" record, or the right to direct email messages addressed to domain names owned by us and used in this business. Although we do no operate the service or have any role in the delivery of messages sent by users of the service, our position as the registrant of the domain names used as addresses for email accounts maintained by such service may subject us to claims from time to time. We could face liability for defamation, copyright, patent or trademark infringement, harassment, unsolicited commercial e-mail and other claims based on the content of the messages transmitted over the service of this business. These claims, even if without merit, can cause us to incur legal expenses and may divert management time and resources.
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, 2003, we had an aggregate of 17,316,802 shares of Class A and Class B common stock outstanding. As of February 28, 2003 we had options to purchase approximately 2.7 million shares of Class A common stock outstanding. As of February 28, 2003, we had warrants to purchase 1,843,942 shares of Class A common stock outstanding. As of February 28, 2003, we had approximately 4,397,914 shares of Class A common stock issuable upon conversion of outstanding senior convertible notes and an indeterminate number of additional shares of Class A common stock issuable over five years in payment of interest on such senior notes. In addition, we had 127,151 shares of Class A common stock issuable upon conversion of our remaining outstanding 7% Convertible Subordinated Notes due 2005 at an exercise price of $189.50 per share. Moreover, we have issued or committed to issue additional shares in connection with the proposed elimination of our debt. See "Risk Factors That May Affect Future Results - We have incurred significant indebtedness for money borrowed, and we may be unable to pay debt service on this indebtedness."
As of February 28, 2003, approximately 16.2 million shares of Class A common stock and Class B common stock were freely tradable, in some cases subject to the volume and manner of sale limitations contained in Rule 144. As of such date, approximately 1.1 million shares of Class A common stock will become available for sale at various later dates upon the expiration of one-year holding periods or upon the expiration of any other applicable restrictions on resale. We are likely to issue large amounts of additional Class A common stock, which may also be sold and which could adversely affect the price of our stock.
As of February 28, 2003, the holders of approximately 6.3 million shares of outstanding Class A common stock, the holders of 1.8 million shares of Class A common stock issuable upon exercise of our outstanding warrants and the holders of approximately 5.7 million shares of Class A common stock issuable upon conversion of our outstanding senior or subordinated convertible notes and issuable in payment of interest over the first 18 months after the date of issuance on our senior convertible notes, had the right, subject to various conditions, to require us to file registration statements covering their shares, or to include their shares in registration statements that we may file for ourselves or for other stockholders. By exercising their registration rights and selling a large number of shares, these holders could cause the price of the Class A common stock to fall. An undetermined number of these shares have been sold publicly pursuant to Rule 144.
Our Class A common stock may be subject to delisting from the Nasdaq National Market.
Our Class A common stock faces potential delisting from the Nasdaq National Market which could hurt the liquidity of our Class A common stock. We may be unable to comply with the standards for continued listing on the Nasdaq National Market. These standards require, among other things, that our Class A common stock have a minimum bid price of either $1 or $3. Specifically, an issuer will be considered non-compliant with the minimum bid price requirement only if it fails to satisfy the applicable requirement for any 30 consecutive trading day period. It would then be afforded a 90 calendar day grace period in which to regain compliance. In addition, the listing standards require that we maintain compliance with various other standards, including market capitalization or total assets and total revenue, number of publicly held shares, which are shares held by persons who are not officers, directors or beneficial owners of 10% of our outstanding shares, and market value of publicly held shares. If we do not comply with the $3 minimum bid price, but we do comply with the $1 minimum bid price, then we must comply with certain other standards, including a $10 million minimum stockholders' equity requirement. The minimum bid price of our stock was below $1 during various periods in the fourth quarter of 2000 and the first quarter of 2001 and was below $1 during the period from March 14, 2001 through January 22, 2002.
On January 23, 2002, we effected a ten-for-one reverse stock split. Although our stock price has exceeded the $1 minimum bid price requirement. for a period of time since our reverse stock split, our stock price was also below $1.00 during the period from July 10, 2002 through July 26, 2002 and from July 30, 2002 through August 16, 2002 and from November 18, 2002 until the present. On December 24, 2002 Nasdaq granted us 90 calendar days, or until March 24, 2003, to regain compliance. On March 11, 2003, the SEC declared effective Nasdaq's rule filing which extends the 90 day period to 180 days. Accordingly, the Company now has until June 23, 2003 to regain compliance. In order to regain compliance, the bid price for the Company's Class A common stock must close at or above $1 per share for 10 consecutive trading days. If we are unable to regain compliance, we may be subject to delisting.
As of December 31, 2002, we had a total stockholders' deficit in the amount of $61.8 million. As a result, we are currently not in compliance with the $10 million minimum total stockholders' equity requirement. We will attempt to regain compliance with this requirement through the elimination of debt and the issuance of additional equity.
We are also required to maintain at least 3 independent directors on our board to satisfy the Nasdaq's audit committee requirements. As a result of the resignations of Mr. Donaldson and Mr. Ketchum from our Board of Directors on November 12, 2002 and March 31, 2003, respectively, we will need to appoint two qualified independent directors in order to be in compliance with this requirement. Nasdaq initially granted the Company a 90 day extension until February 11, 2003, subsequently extended to March 31, 2003, to regain compliance with the independent director requirement. We intend to seek a further extension from Nasdaq pending the completion of our debt restructuring. If we are unable to obtain an extension or to find suitable candidates by the date specified in any such extension, we may be subject to delisting.
No assurance can be given that we will regain compliance with the minimum bid requirement, the total stockholders' equity requirement or the independent director requirement or that we will maintain compliance with all of the other applicable listing standards in the future.
If our common stock were to be delisted from trading on the Nasdaq National Market and were neither re-listed thereon nor listed for trading on the Nasdaq Small Cap Market or other recognized securities exchange, trading, if any, in the Class A common stock may continue to be conducted on the OTC Bulletin Board or in the non-Nasdaq over-the-counter market. Delisting would result in limited release of the market price of the Class A common stock and limited news coverage of EasyLink and could restrict investors' interest in our Class A common stock and materially adversely affect the trading market and prices for our Class A common stock and our ability to issue additional securities or to secure additional financing.
Our stock price has been volatile and we expect that it will continue to be volatile.
Our stock price has been volatile since our initial public offering and we expect that it will continue to be volatile. As discussed above, our financial results are difficult to predict and could fluctuate significantly. In addition, the market prices of securities of electronic services companies have been highly volatile. A stock's price is often influenced by rapidly changing perceptions about the future of electronic services or the results of other Internet or technology companies, rather than specific developments relating to the issuer of that particular stock. As a result of volatility in our stock price, a securities class action may be brought against us. Class-action litigation could result in substantial costs and divert our management's attention and resources.
We may have continuing obligations in connection with the sale of our advertising network business.
On March 30, 2001, we completed the sale of our advertising network business to Net2Phone, Inc. Included in the sale was our rights to provide e-mail-based advertising and permission marketing solutions to advertisers, as well as our rights to provide e-mail services directly to consumers at the www.mail.com Web site and in partnership with other Web sites. In connection with the sale, we entered into a hosting agreement under which we agreed to host or arrange to host the consumer e-mailboxes for Net2Phone for a minimum of one year. During the second quarter of 2001, we completed the migration of the hosting of these consumer mailboxes to a third party provider whom we paid for this service. On November 14, 2001, we entered into an agreement with Net2Phone which terminated the hosting agreement as of September 30, 2001. Net2Phone has subsequently transferred this business to a third party.
Notwithstanding the migration of the consumer mailboxes to the third party provider, the termination of the hosting agreement with Net2Phone and the assignment to Net2Phone of our Web site contracts with third parties, we may nonetheless remain liable for obligations under some of such third party Web site contracts. Accordingly, we may have liability if there is a breach on the part of the third party to which we have migrated the hosting or on the part of Net2Phone under the third party Web site agreements that were assigned to them.
Item 2
Item 2 Properties
United States
Effective March 2003, 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 20,000 square feet still remaining under leases expiring in 2005 and 2006. In addition, we have office and development lab space at four other locations throughout the United States under leases expiring primarily in 2005 and 2006; three U.S. network installations co-located in telehousing facilities under short-term leases; and sales offices under short term leases for our business messaging staff in the Chicago, Dallas, Ft. Lauderdale, Los Angeles, New York and San Francisco metropolitan areas. In connection with the acquisition of the EasyLink Services business from AT&T we also lease approximately 5,000 square feet under an Equipment Space Sublease Agreement with AT&T for the operation of the network equipment for this business through January 31, 2005.
While we believe that these facilities meet our anticipated needs at least through the end of 2003, we continually review our needs and may add facilities in the future.
International
We lease approximately 28,000 square feet of office space in six locations in England. The leases expire between May 2003 and June 2017, with cancellation provisions available in the two longer term leases, 10 years prior to expiration in 2004 and 2007.
We lease approximately 18,000 square feet of office space in locations in Hong Kong, Germany, Singapore, Malaysia, Dubai, France, South Korea and India. The leases expire between June 2002 and December 2004.
We also have telehousing and co-location agreements under short-term leases for our communications nodes around the world.
Item 3
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; and contract claims. These claims include pending 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.
The Company has also received notices or claims from certain third parties for disputed and unpaid accounts payable. The Company believes that it has appropriately reserved for the amount of any liability that may arise out of these matters, and management believes that these matters will be resolved without a material effect on the Company's financial position or results of operations.
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. The Court has subsequently ordered a settlement conference to be held on April 1, 2003. Although we intend to defend vigorously the matter described above, we cannot assure you that the settlement conference will be successful and, if it is not, that our ultimate liability, if any, in connection with the claim will not exceed our reserves or have a material adverse effect on our results of operations, financial condition or cash flows.
On February 27, PTEK Holdings, Inc. announced that it had entered into an agreement with AT&T to purchase 1,423,980 shares of outstanding Class A common stock of EasyLink held by AT&T and a promissory note of EasyLink held by AT&T. The promissory note, with a principal amount of $10 million, represents approximately 13% of the aggregate principal amount of debt that EasyLink has been seeking to eliminate pursuant to its debt restructuring plan. In response to PTEK's announcement, we commenced on March 17, 2003 an action against AT&T Corp., PTEK Holdings, Inc. and PTEK's subsidiary Xpedite Systems, Inc. The suit seeks, among other things, to enjoin AT&T from selling the EasyLink promissory note held by AT&T to PTEK, to compel AT&T to participate in EasyLink's current debt restructuring and to enjoin Xpedite and PTEK from contacting EasyLink's creditors and making false statements to EasyLink's customers and creditors regarding EasyLink and its financial position. EasyLink believes that if the sale of the note to PTEK is permitted to occur, EasyLink's current debt restructuring may be at substantial risk. See "Risk Factors That May Affect Future Results - We have incurred significant indebtedness for money borrowed, and we may be unable to pay debt service on this indebtedness." The Court has ordered limited document discovery and has established a timetable for considering EasyLink's motion, including a hearing on May 1, 2003 at which oral argument will be made. No assurance can be given as to the outcome of this matter.
Item 4
Item 4 Submission of Matters to a Vote of Security Holders
No matters were submitted during the fourth quarter of the fiscal year covered by this report to a vote of security holders, through the solicitation of proxies or otherwise.
Part II
Item 5
Item 5 Market for the Registrant's Common Equity and Related Stockholder Matters
Stockholder Data
The Nasdaq closing market price at February 28, 2003 was $0.61.
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 finance the expansion of our business.
Number of Security Holders
At February 28, 2003, the approximate number of holders of record of Class A and Class B common stock was 764 and 1, respectively.
Stock listings
The principal market on which the common stock is traded is the NASDAQ National Market (NASD) under the symbol "EASY".
Recent Sales of Unregistered Securities
During the three months ended December 31, 2002, EasyLink Services issued 233,630 Class A common stock to third parties in connection with business transactions or granted options to employees in reliance upon the exemption from registration pursuant to Section 4(2) of the Securities Act of 1933 and Rule 701 or Regulation S promulgated thereunder in various transactions as follows:
During the three months ended December 31, 2002, we issued 115,676 shares of Class A common stock to employees at a weighted average price of $0.96 per share representing the Company's matching contribution to its 401(k) plan.
During the three months ended December 31, 2002, we issued 111,420 shares valued at $94,707, in connection with interest payments on our debt.
During the three months ended December 31, 2002, we issued 6,534 shares valued at $6,001 in association with the settlement of a contingent purchase price obligation arising out of the acquisition of MyIndia.com by our India.com subsidiary.
Item 6
Item 6 Consolidated Selected Financial Data
The following consolidated selected financial data should be read in conjunction with the consolidated financial statements and the notes to these statements and "Management's Discussion and Analysis of Financial Condition and Results of Operations" elsewhere in this document. The consolidated financial statements included herein have been prepared assuming that the Company will continue as a going concern. The Company's independent public accountants have included two explanatory paragraphs in their audit report accompanying the 2002 consolidated financial statements. The first explanatory paragraph states that the Company has suffered recurring losses from operations since inception and has a working capital deficiency and stockholders' deficit that raise substantial doubt about its ability to continue as a going concern. Management's plans in regard to this matter are also described in Note 1(b). The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty. The second explanatory paragraph states that as discussed in Notes 1(k), 1(t) and 7, the Company adopted Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets" and Statement of Financial Accounting Standards No. 145, "Rescission of FASB Statements No. 4, 44 and 64, and Amendment of FASB Statement No. 13, Technical Corrections" in the year ended December 31, 2002.
We believe that due to the many acquisitions that we made in recent years and dispositions during 2001, the period to period comparisons for 1998 through 2002 are not meaningful and should not be relied upon as indicative of future performance.
Five Year Summary of Selected Financial Data (in thousands, except per share and employee data)
(a) Included in operating expenses are:
(b) Included in other income (expense), net are:
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.
Item 7
Item 7 Management's Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis of the financial condition and results of operations should be read in conjunction with our consolidated financial statements and the related notes included elsewhere in this annual report. The consolidated financial statements included herein have been prepared assuming that the Company will continue as a going concern. The Company's independent public accountants have included two explanatory paragraphs in their audit report accompanying the 2002 consolidated financial statements. The first explanatory paragraph states that the Company has suffered recurring losses from operations since inception and has a working capital deficiency and stockholders' deficit that raise substantial doubt about its ability to continue as a going concern. Management's plans in regard to this matter are also described in Note 1(b). The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty. The second explanatory paragraph states that as discussed in Notes 1(k), 1(t) and 7, the Company adopted Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets" and Statement of Financial Accounting Standards No. 145, "Rescission of FASB Statements No. 4, 44 and 64, and Amendment of FASB Statement No. 13, Technical Corrections" in the year ended December 31, 2002.
Overview
On April 2, 2001, we changed our name to EasyLink Services Corporation. We believe that the name change helped create a corporate identity tied to our focus on outsourced electronic information exchange services. 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 over 800,000 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 delivery services such as electronic data interchange or "EDI," telex, desktop fax, broadcast and production messaging services; groupware hosting services; services that protect corporate e-mail systems such as virus protection, spam control and content filtering services; and document capture and management services such as fax to database, fax to data and data conversion services.
Until March 30, 2001, we also offered advertising services and consumer e-mail services to Web sites, ISP's and direct to consumers. In this market, we provided Web-based e-mail services or WebMail to Internet Service Providers (ISPs) including several of the world's top ISPs, and we partnered with top branded Web sites to provide WebMail services to their users. In addition, we served the market directly through our flagship web site www.mail.com. On October 26, 2000, we announced our intention to sell our advertising network business and stated that we would focus exclusively on our established outsourced messaging business. We also announced that as a result of our decision to focus on outsourced messaging business, we would streamline the organization and further integrate our technological and operational infrastructures. On March 30, 2001, we completed the sale of our advertising network and consumer e-mail business to Net2Phone. In connection with the sale, we entered into a hosting agreement under which we would host or arrange for a third party to host the consumer e-mailboxes for Net2Phone for a minimum of one year. In November 2001, we terminated the hosting agreement with Net2Phone.
In March 2000, we formed WORLD.com to develop the Company's extensive portfolio of domain names into major Web properties, such as Asia.com and India.com, which served the business-to-business and business-to-consumer marketplace. Through its subsidiaries, WORLD.com generated revenues primarily from sales of information technology products, system integration and website development for other companies, advertising related sales and commissions earned from booking travel arrangements. On November 2, 2000, we announced our intent to sell all assets not related to our core outsourced messaging business, including Asia.com Inc., India.com Inc., and our portfolio of domain names. On May 3, 2001, our majority-owned subsidiary Asia.com, Inc. sold its business to an investor group. In October 2001, we sold a subsidiary of India.com, Inc. and we have ceased conducting its portal business. Accordingly, the results of World.com and its subsidiaries have been restated as discontinued operations in our financial statements for all periods presented. See Notes 1(c) and 10 to our consolidated financial statements for additional information.
For the year ended December 31, 2002, total revenues were $114.4 million compared to $123.9 million in 2001 and $52.7 million in 2000. Our net loss was $85.5 million for the year ended December 31, 2002 as compared to $206.3 million for the year ended December 31, 2001 and $229.5 million for the year ended December 31, 2000.
During 2002, we generated all our revenues from information exchange services to enterprises. During 2001, we generated approximately 98% of our revenues from information exchange services provided to enterprises and approximately 2% of our revenue from the advertising network business and other sources. For the years ended December 31, 2002, 2001, and 2000, approximately $114.4 million, $122.2 million and $28.9 million, respectively, of our revenue was generated from companies we acquired since January 1, 2000.
In light of the evolving nature of our business and our limited operating history, we believe that period-to-period comparisons of our revenues and operating results are not meaningful and should not be relied upon as indications of future performance. The substantial increase in revenues for 2001 and 2000 can be attributable to acquisitions and, in 2000, revenues from our advertising network business that was sold in March 2001. We believe the nature of our revenues in future periods will be more comparable to that of 2002.
Our prospects should be considered in light of risks described in the section of this report entitled "Risk Factors That May Affect Future Results."
Critical Accounting Policies
In response to the Securities & Exchange Commission's (SEC) Release No. 33-8040, "Cautionary Advice Regarding Disclosure About Critical Accounting Policies," we have identified the most critical accounting principles upon which our financial status depends. Critical principles were determined by considering accounting policies that involve the most complex or subjective decisions or assessments. The most critical accounting policies were identified to be those related to revenue recognition, long-lived assets and intangible assets.
Revenue Recognition
The Company's business messaging services include message delivery services such as electronic data interchange or "EDI," telex, desktop fax, broadcast and production messaging services; groupware hosting services; services that help protect corporate e-mail systems such as virus protection, spam control and content filtering services, and professional messaging services and support. The Company derives revenues monthly per-message and usage-based charges for our message delivery services; from monthly per-user or per-message fees for groupware hosting and virus protection, spam control and content filtering services, and license and consulting fees for our professional services. Revenue from e-mail and groupware hosting services, virus protection, spam control and content filtering services, message delivery services and professional services is recognized as the services are performed.
Facsimile license revenue is recognized over the average estimated customer life of 3 years. The Company also licenses software under noncancellable license agreements. License fee revenues are recognized when a noncancellable license fee is in force, the product has been delivered and accepted, the license fee is fixed, vendor specific objective evidence exists for the undelivered element and collectibility is reasonably assured. Maintenance and support revenues are deferred and recognized ratably over the term of the related agreements. The Company also may host the software if requested by the customer. The customer has the option to decide who hosts the application. If the Company provides the hosting, revenue from hosting is ratably recognized over the hosting periods. Pursuant to Emerging Issues Task Force 00-3, "Application of AICPA Statement of Position 97-2 to Arrangements That Include the Right to Use Software on Another Entity's Hardware", because the customer has the option of hosting the software itself or contracting with an unrelated third party to host the software, the hosting fee is ratably recognized over the hosting period in accordance with the respective accounting guidance.
The Company also enters into supplier arrangements providing bulk messaging services, at a fixed price and minimum quantity to certain customers for a specified period of time. Revenues earned under such arrangements are recognized over the term of the arrangement assuming collection of the resultant receivable is probable.
Prior to the sale of the Advertising Network Business on March 30, 2001 (see Note 4), advertising revenues were derived principally from the sale of banner advertisements. Revenue on banner advertisements was recognized ratably as the advertisements or respective impressions were delivered either on a "cost per thousand" or "cost per action" basis. Revenue on upfront placement fees and promotions was deferred and recognized over the term of the corresponding agreement.
The Company also traded advertisements on its Web properties in exchange for advertisements on the Internet sites of other companies as part of the ad network business. Barter revenues and expenses were recorded at the fair market value of services provided or received; whichever is more determinable in the circumstances. Revenue from barter transactions were recognized as income when advertisements were delivered on the Company's Web properties. Barter expense was recognized when the Company's advertisements are run on other companies' Web sites, which is typically in the same period when barter revenue was recognized. If the advertising impressions were received from the customer prior to the Company delivering the agreed-upon advertising impressions, a liability was recorded, and if the Company delivered the advertising impressions to the other companies' Web sites prior to receiving the agreed-upon advertising impressions, a prepaid expense was recorded. At December 31, 2002, 2001 and 2000, the Company did not record a liability for barter advertising to be delivered. Barter revenues, which are a component of advertising revenue, amounted to $0.6 million and $4.3 million for the years ended December 31, 2001 and 2000, respectively. For the years ended December 31, 2001 and 2000, barter expenses, which is a component of cost of revenues, were approximately the same $0.6 million and $4.3 million, respectively.
The advertising network subscription services were deferred and recognized ratably over the term of the subscription periods of one, two and five years as well as eight years for its lifetime subscriptions. Commencing March 10, 1999, the Company no longer offered lifetime memberships and only offered monthly and annual subscriptions. The eight-year amortization period for lifetime subscriptions is based on the weighted-average expected usage period of a lifetime member. The Company offered 30-day trial periods for certain subscription services. The Company only recognized revenue after the 30-day trial period expires. Deferred revenues principally consist of subscription fees received from members for use of the Company's premium email services. The Company was obligated to provide any enhancements or upgrades it develops and other support in accordance with the terms of the applicable Mail.com Partner agreements. The Company provided an allowance for credit card chargebacks and refunds on its subscription services based upon historical experience. The Company provided pro rated refunds and chargebacks to subscription members who elect to discontinue their service. The actual amount of refunds and chargebacks approximated management's expectations for all periods presented. Deferred revenue represents payments that have been received in advance of the services being performed.
Other revenues includes revenues from the sale of domain names, which are recognized at the time when the ownership of the domain name is transferred provided that no significant Company obligation remains and collection of the resulting receivable is probable. To date, such revenues have not been material.
Accounts Receivable
We perform ongoing credit evaluations of our customers and adjust credit limits based upon payment history and the customer's current credit worthiness, as determined by a review of their current credit information. We continuously monitor collections and payments from our customers and maintain a provision for estimated credit losses based upon historical experience and any specific customer collection issues that have been identified. While such credit losses have historically been within our expectations and the provisions established, we cannot guarantee that we will continue to experience the same credit loss rates that have been experienced in the past.
Impairment of Long-Lived Assets
Effective January 1, 2002, we adopted SFAS No. 142, "Goodwill and Other Intangible Assets" and SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Asset". SFAS 142 eliminates the amortization of goodwill and indefinite-lived intangible assets, addresses the amortization of intangible assets with finite lives and addresses impairment testing and recognition for goodwill and intangible assets. SFAS No. 144 establishes a single model for the impairment of long-lived assets. We assess goodwill 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 nonamortizable 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 in 2002 are accounted for in accordance with SFAS No. 146. Prior to 2002, restructuring activities are accounted for in accordance with the guidance provided in the consensus opinion of the Emerging Issues Task Force ("EITF") in connection with EITF Issue 94-3 ("EITF 94-3"). EITF 94-3 generally requires, with respect to the recognition of severance expenses, management approval of the restructuring plan, the determination of the employees to be terminated, and communication of benefit arrangement to employees.
In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities." SFAS No. 146 will supersede Emerging Issues Task Force Issue No. 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)." SFAS No. 146 requires that costs associated with an exit or disposal plan be recognized when incurred rather than at the date of a commitment to an exit or disposal plan. In accordance with the standard, the Company will apply SFAS No. 146 to exit or disposal activities initiated after December 31, 2002.
ACQUISITIONS, INVESTMENTS AND DIVESTITURES
Continuing Operations
GN Comtext
During July 2001, we acquired the assets of GN Comtext ("GN") for $1. Additionally, we received a $1.1 million unsecured interest free loan from the former parent company of GN, GN Store Nord A/S, which was paid in the fourth quarter of 2001, and received approximately $175,000 for transition services revenues which were recorded as a reimbursement of costs during the third quarter of 2001 and will collect and retain a percentage of certain accounts receivable collected on behalf of GN. GN offers value-added messaging services to over 3,000 customers ranging from small business to multi-national companies around the world. The excess of fair market value of the assets acquired and the liabilities assumed over the purchase price resulted in negative goodwill of $782,000 which was recognized as an extraordinary gain during the quarter ended September 30, 2001 in accordance with the provisions of Financial Accounting Standards Board Statement No. 141, "Business Combinations."
Swift Telecommunications, Inc. and EasyLink Services
On February 23, 2001, we acquired Swift Telecommunications, Inc., ("STI"). Just prior to the acquisition in January 2001, STI acquired the EasyLink Services business ("EasyLink Services") from AT&T Corp. At the closing of the acquisition by STI of the EasyLink Services business from AT&T, we advanced $14 million to STI in the form of a loan, the proceeds of which were used to fund part of the cash portion of the purchase price to AT&T. Upon the closing of the acquisition of STI, we assumed a $35 million note issued by STI to AT&T. The $35 million note is secured by the assets of STI, including the EasyLink Services business, and the shares of our Class A common stock issued to the sole shareholder (who became an officer and director of EasyLink) in the merger. The note was payable in equal monthly installments over four years with interest at the rate of 10% per annum. In November 2001, the note, and accrued interest thereon, was exchanged for a new note in the principal amount of $10 million, 1 million shares of the Company's Class A common stock and warrants to purchase an additional 1 million shares of stock. The $10 million note is secured by the same security interests that secured the $35 million note. See Note 8 - Notes Payable for a description of the Restructuring of certain debt and lease obligations.
Upon the closing of the acquisition of STI, the Company paid to the sole shareholder of STI (who became an officer and director of EasyLink) $835,294 in cash and issued an unsecured note for approximately $9.2 million and approximately 1.9 million shares of our Class A common stock valued at approximately $22.9 million as the purchase price for the acquisition of STI. We will also pay additional consideration to the sole shareholder of STI equal to the amount of the net proceeds, after satisfaction of certain liabilities of STI and its subsidiaries, from the sale or liquidation of the assets of one of STI's subsidiaries. We also reimbursed the sole shareholder of STI for a $1.5 million advance made to STI, the proceeds of which were used to fund the balance of the cash portion of the purchase price for STI's acquisition of the EasyLink Services business and certain other obligations to AT&T. The $9.2 million note was non-interest bearing and payable in four equal semi-annual installments over two years. In November 2001, this note was exchanged for a new note in the principal amount of $2.7 million, 268,296 shares of the Company's Class A common stock and warrants to purchase 268,296 shares of stock. See Note 8 - Notes Payable for a description of the restructuring and settlement of certain debt and lease obligations.
In connection with the acquisition of STI on February 23, 2001, we also entered into a conditional commitment to acquire Telecom International, Inc. ("TII"). TII was an affiliate of STI prior to the acquisition of STI by us. The sole shareholder of STI (who became an officer and director of the Company) is a principal beneficial shareholder of TII. The purchase price for TII was originally agreed to be $117,646 in cash, a promissory note in the aggregate principal amount of approximately $1,294,118 and 267,059 shares of our Class A common stock. In order to facilitate the debt restructuring and to reduce our debt obligations and cash commitments, the parties agreed to modify our commitments in respect of TII. In lieu of acquiring TII, we purchased certain assets owned by TII for $250,000, payable in six monthly payments of $10,000 commencing May 27, 2002 and one payment of $190,000 on November 27, 2002. We also agreed to reimburse TII for up to 50% of TII's payments on certain accounts payable up to a maximum reimbursement of $200,000, to cancel a $236,490 payable owed by STI to us and to issue up to 20,000 shares of Class A common stock to TII valued at $122,000. In addition, we issued 300,000 shares of Class A common stock to TII valued at $1,890,000.
As part of the transaction with STI, we also entered into a conditional commitment to acquire the 25% minority interests in two STI subsidiaries for $47,059 in cash, promissory notes in the aggregate principal amount of approximately $517,647 and 106,826 shares of Class A Common Stock. This transaction is subject to certain conditions, including satisfactory completion of due diligence, receipt of regulatory approvals and other customary conditions.
Netmoves
On February 8, 2000, we acquired NetMoves Corporation ("NetMoves"), a provider of Internet fax transmission services for approximately $168.3 million including acquisition costs of approximately $2.1 million. The acquisition was accounted for as a purchase business combination. We issued 635,448 shares of Class A common stock valued at approximately $145.7 million based upon our average trading price at the date of acquisition. In addition, we assumed outstanding options and warrants of NetMoves which represent the right to purchase 96,244 shares and 5,734 shares respectively, of our Class A common stock at weighted average exercise prices of $66.90 and $86.40, respectively. The options and warrants were valued at an aggregate of approximately $20.5 million.
NetMoves (renamed Mail.com Business Messaging Services, Inc., and, again, EasyLink Services, USA, Inc.) designs, develops and markets to businesses a variety of Internet document delivery services, including e-mail-to-fax, fax-to-e-mail, fax-to-fax and broadcast fax services. This acquisition enhanced our presence in the domestic and international business service market, provided us with an established sales force and international distribution channels and expanded our offering of Internet-based messaging services.
Allegro
On August 20, 1999, we acquired The Allegro Group, Inc. ("Allegro"). Pursuant to the terms of the merger agreement, Allegro became a wholly owned subsidiary of the Company. In connection with this acquisition, we paid approximately $3.2 million in cash and issued 110,297 shares of our Class A common stock to the shareholders of Allegro valued at $17.1 million based upon our average trading price at the date of acquisition. We also paid one-time signing bonuses of $800,000 to employees of Allegro who were not shareholders of Allegro. We were obligated to pay additional amounts based upon Allegro's achievement of specified revenue and spending targets in 2000. This contingent payment would consist of up to $3.2 million payable in cash, additional bonus payments of up to $800,000 and up to $16.0 million payable in shares of our Class A common stock based on the market value of the stock at the time of payment, up to a maximum of 200,000 shares. We also granted options to Allegro employees to purchase approximately 62,500 shares of our Class A common stock at an exercise price of $160.00 per share. These options vest quarterly over four years, subject to continued employment. This acquisition has been accounted for as a purchase business combination. On November 2, 2000, the Company settled its contingent consideration obligation with Allegro. On December 31, 2001, we paid to the former shareholders of Allegro 28,318 shares of our Class A common stock. Upon issuance of the shares, the Company adjusted the purchase price and goodwill by $139,000.
TCOM
On October 18, 1999, the Company acquired TCOM, Inc. ("TCOM") a software technology development firm specializing in the design of software for the telecommunications and computer telephony industries. The addition of TCOM expanded the Company's ability to deliver Internet services that meet the demand of our business customers. The Company is not continuing the business operations of TCOM but made the acquisition in order to obtain technology and development resources. We paid $2 million in cash and 43,983 shares of our Class A common stock valued at approximately $6.1 million based upon our average trading price at the date of acquisition. In addition, we were obligated to pay to the continuing employees of TCOM, bonuses totaling $400,000, payable in six-month installments after the closing date in the amounts of $74,000, $88,000, $116,000 and $122,000, provided such employees continue their employment through the applicable payment dates. As of December 31, 2001, approximately $300,000 was paid in final settlement of these obligations.
We were obligated to pay additional consideration to the sellers of TCOM based upon the achievement of certain objectives over an 18-month period. The additional consideration would consist of up to $1.0 million payable in cash and up to $2.75 million payable in shares of our Class A common stock based on its market value at the time of payment, although the market value shall be deemed to be not less than $40.00 per share. We also granted options to TCOM employees to purchase approximately 45,933 shares of our Class A common stock at an exercise price of $130.60 per share. These options vest quarterly over 4 years subject to continued employment. On November 1, 2000, the Company settled the 12 month portion of its contingent consideration obligation with TCOM. We paid the former shareholders of TCOM a total of $3.75 million, comprised of a cash payment of $1 million and $2.75 million in Class A common stock. The remaining portion of the contingent consideration obligation was settled with the issuance of 162,083 shares valued at approximately $1.3 million in April 2001. There are no longer any TCOM employees remaining with the Company. Accordingly, $5.1 million of goodwill was written off in 2001 and recorded as an impairment in the 2001 statement of operations.
Messaging Businesses
During the third quarter of 2000, the Company acquired two business messaging companies by issuing 71,020 shares of Class A common stock valued at approximately $4.3 million based upon the Company's average trading price at the date of acquisition. These acquisitions were accounted for as purchase business combinations.
InTandem
On April 17, 2000, in exchange for $500,000 in cash, we acquired certain source code technologies, trademarks and related contracts relating to the InTandem collaboration product ("InTandem") from IntraACTIVE, Inc., a Delaware corporation (now named Bantu, Inc., "Bantu"). On the same date, we also paid Bantu an upfront fee of $500,000 for further development and support of the InTandem product. On the same date, pursuant to a Common Stock Purchase Agreement, the Company acquired shares of common stock of Bantu representing approximately 4.6 % of Bantu's outstanding capital stock in exchange for $1 million in cash and 46,296 shares of Class A common stock, valued at approximately $3.6 million. Pursuant to the Common Stock Purchase Agreement, the Company also agreed to invest up to an additional $8 million in the form of shares of Class A Common stock in Bantu in three separate increments of $4 million, $2 million and $2 million, respectively, based upon the achievement of certain milestones in exchange for additional shares of Bantu common stock representing 3.7%, 1.85% and 1.85%, respectively, of the outstanding common stock of Bantu as of April 17, 2000. The number of shares of our Class A common stock issuable at each closing will be based on the greater of $9 per share and the average of the closing prices of our Class A common stock over the five trading days prior to such closing date. In July 2000, we issued an additional 9,259 shares of our Class A common stock valued at approximately $590,000 to Bantu in accordance with a true-up provision in the Common Stock Purchase Agreement. In September 2000, we issued an additional 44,444 shares of our Class A common stock valued at approximately $2.9 million as payment for the achievement of a milestone indicated above. In January 2001, the Company issued an additional 22,222 shares of its Class A common stock valued at approximately $285,000 as payment for the achieved milestone indicated above. The Company accounts for this investment under the cost method. During 2002 and 2001, management made assessments of the carrying value of its investment, based upon an incremental investments made by a third party, and determined that the carrying value of this cost-based investment was permanently impaired as it was in excess of its estimated fair value. Accordingly, we wrote down the value of our investment in Bantu by $1.0 million and $7.3 million in 2002 and 2001, respectively, as we determined that the decline in its value was other-than-temporary. These write-downs were recorded as an impairment of investments within other income (expense) in the 2002 and 2001 statements of operations.
3Cube
On July 14, 1999, we purchased an equity interest in 3Cube, Inc ("3Cube"). Under the agreement, we paid $1.0 million in cash and issued 8,008 shares of our Class A common stock, valued at approximately $2.0 million, in exchange for 307,444 shares of 3Cube convertible preferred stock, which represents an equity interest of less than 20% in 3Cube. We recorded this transaction under the cost method. This agreement also included a technology licensing arrangement, whereby 3Cube agreed to integrate its Internet facsimile technology into our email service across our partner network. On June 30, 2000, the Company made an additional investment in 3Cube by issuing 25,505 shares of Class A common stock valued at approximately $1.5 million in exchange for 50,411 shares of 3Cube Series C Preferred Stock. As of December 31, 2000, we owned preferred stock of 3Cube representing an ownership interest of 21% of the combined common and preferred stock outstanding of 3Cube. Accordingly, we then accounted for this investment under the equity method of accounting. Under the equity method, our proportionate share of each investee's operating losses and amortization of the investor's net excess investment over its equity in each investee's net assets is included in loss on equity investments. The effect of this change from the cost method to the equity method of accounting resulted in a decrease of the carrying value of the investment by $2.1 million which was recorded as a loss on equity investment in our 2000 statement of operations. In addition, in December 2000, we wrote down the value of our investment in 3Cube by $200,000 as it was determined that the decline in its value was other-than-temporary which was recorded as an impairment of investments within other income (expense) in our 2000 statement of operations. See the section on Impairment Charges included in the Results of Operations section below for additional information. In 2001, we sold this investment for its carrying value of $2 million.
Discontinued Operations
In March 2000, we formed World.com, Inc. in order to develop our portfolio of domain names into independent web properties and subsequently acquired or formed its subsidiaries Asia.com, Inc. and India.com, Inc., in which World.com was the majority owner. On March 30, 2001, we announced our intention to sell all assets not related to our core outsourced messaging business including Asia.com, Inc., India.com, Inc. and our portfolio of domain names. Accordingly, World.com has been reflected as a discontinued operation.
The information below pertains to certain events and activities associated with the operations of World.com and include: financings in connection with India.com, domain names included in discontinued operations, the acquisition and subsequent disposition of eLong.com, which was renamed to Asia.com, Inc., and other acquisitions made by World.com.
On March 14, 2000, we acquired eLong.com, Inc., a Delaware corporation ("eLong.com") for approximately $62 million including acquisition costs of approximately $365,000. eLong.com, through its wholly owned subsidiary in the People's Republic of China, operates the Web Site www.eLong.com, which is a provider of local content and other internet services. The acquisition was accounted for as a purchase business combination. Concurrently with the merger, eLong.com changed its name to Asia.com, Inc. ("Asia.com"). In the merger, we issued to the former stockholders of eLong.com an aggregate of 359,949 shares of Class A common stock valued at approximately $57.2 million, based upon our average trading at the date of acquisition. All outstanding options to purchase eLong.com common stock were converted into options to purchase an aggregate of 27,929 shares of Class A common stock. The options were valued at approximately $4.4 million.
During the fourth quarter of 2000, we wrote off approximately $7.8 million of goodwill, as it was determined that the carrying value had become permanently impaired as a result of our November 2, 2000 decision, as approved by the Board of Directors, to sell all assets not related to our core messaging business, including our Asia-based businesses. Please see the discussion on Impairment Charges included in the Results of Operations and Liquidity and Capital Resources sections below for additional information.
In addition, we were obligated to issue up to an additional 71,990 shares of Class A common stock in the aggregate to the former stockholders of eLong.com if EasyLink or Asia.com acquired less than $50.0 million in value of businesses engaged in developing, marketing or providing consumer or business internet portals and related services focused on the Asian market or a portion thereof, or businesses in furtherance of such a business, prior to March 14, 2001. The actual amount of shares to be issued was based upon the amount of any shortfall in acquisitions below the $50.0 million target amount. Based upon the value of the acquisitions completed as of March 14, 2001, we issued approximately 7,500 shares of our Class A common stock to the former stockholders of eLong.com. See Note 10 to our consolidated financial statements for additional information.
In the merger, certain former stockholders of eLong.com retained shares of Class A common stock of Asia.com representing approximately 4.0% of the outstanding common stock of Asia.com. Under a separate Contribution Agreement with Asia.com these stockholders contributed an aggregate of $2.0 million in cash to Asia.com in exchange for additional shares of Class A common stock of Asia.com, representing approximately 1.9% of the outstanding common stock of Asia.com. Pursuant to the Contribution Agreement, we (1) contributed to Asia.com the domain names Asia.com and Singapore.com and $10.0 million in cash and (2) agreed to contribute to Asia.com up to an additional $10.0 million in cash over the next 12 months and to issue, at the request of Asia.com, up to an aggregate of 24,242 shares of Class A common stock for future acquisitions. As a result of the transactions effected pursuant to the Merger Agreement and the Contribution Agreement, we initially owned shares of Class B common stock of Asia.com representing approximately 94.1% of the outstanding common stock of Asia.com. Our ownership percentage decreased to 92% as of December 31, 2000. Asia.com granted to management employees of Asia.com options to purchase Class A common stock of Asia.com representing, as of December 31, 2000, 9% of the outstanding shares of common stock after giving effect to the exercise of such options.
During the second quarter of 2000, Asia.com acquired three companies for approximately $18.4 million, including acquisition costs. Payments consisted of cash approximating $500,000, 192,618 shares of our Class A common stock valued at approximately $11.6 million and 467,345 shares of Asia.com Class A common stock valued at approximately $6.1 million, all of which were based upon our average trading price on the dates of acquisition.
During the fourth quarter of 2000, approximately $12 million of goodwill was written off as we determined that the carrying value of the goodwill associated with one of these acquisitions focused on the wireless sector had become permanently impaired as a result of our November 2, 2000 decision, as approved by the Board of Directors, to sell all assets not related to our core messaging business, including our Asia-based businesses. See the discussion on Restructuring Charges included in the Results of Operations section below for additional information.
Under a stock purchase agreement associated with one of the Asia.com acquisitions, we agreed to pay a contingent payment of up to $5 million if certain wireless revenue targets are reached after the closing. The contingent payment was payable in our Class A common stock, cash or, under certain circumstances, Asia.com Class A common stock. We determined that these targets were never achieved.
On May 3, 2001, our majority owned subsidiary Asia.com, Inc. sold its business to an investor group. Under the terms of the sale, the buyer paid Asia.com $1.5 million and assumed eLong.com liabilities of approximately $1.5 million. The consideration paid was determined as a result of negotiations between the buyer and us. In addition, we issued 20,000 shares of its Class A common stock valued at $138,000 in exchange for the cancellation of certain options granted to the former owners of eLong.com. The Company accounted for this transaction as part of the sale of the business of Asia.com. As a result of the sale, we recorded a loss on the sale of eLong.com, Inc. of $264,000. After the closing of the sale, we issued 36,232 shares to eLong.com, Inc. in 2001 as full satisfaction of an indemnity obligation. The indemnity obligation arose out of eLong.com's settlement of a claim brought by former Lohoo shareholders for a contingent payment. Lohoo was previously acquired by eLong.com, Inc.
On March 16, 2000, in exchange for $2 million in cash and 18,569 shares of our Class A common stock valued at approximately $2.9 million, we acquired a domain name from and made a 10% investment in Software Tool and Die, a Massachusetts Corporation. Software Tool and Die is an Internet Service Provider and provides Web hosting services. We concluded that the carrying value of this cost-based investment was permanently impaired based on the achievement of business plan objectives and milestones and the fair value of the investment relative to our carrying value. During the fourth quarter of 2000, we recorded an impairment charge of $4.2 million due to an other-than-temporary decline in the value of this investment due to the decrease in net book value of the investment caused by its losses, as well as a result of our November 2, 2000 decision, as approved by the Board of Directors, to sell all assets not related to its core messaging business, including its Asia-based businesses. This amount was recorded as an impairment of investments within other income (expense) in our 2000 statement of operations. Please see the section on Impairment Charges included in the Results of Operations section below for additional information.
On March 31, 2000, we acquired a Mauritius entity, which in turn owned 80% of an Indian subsidiary, to facilitate future investments in India. The terms were $400,000 in cash and a $1 million 7% note payable due one year from closing. In June 2000, we acquired through the Mauritius entity the remaining 20% of the Indian subsidiary for $2.2 million in cash. In connection with this acquisition, we incurred a $1.8 million charge related to the issuance of 10,435 shares of Class A common stock, as compensation for services performed, and we paid $200,000 cash and an additional $200,000 payable in our Class A common stock as compensation for employees. In October 2001, we sold 90% of the shares of our Multiple Zones Prvt. Ltd. Subsidiary. We recorded a nominal gain on the transaction.
During the second quarter of 2001, we acquired a US and India based company for approximately $600,000, including acquisition costs. The terms were $300,000 in cash and 19,600 shares of our Class A common stock valued at approximately $272,000 based upon our average trading price surrounding the date of acquisition. The acquisition was accounted for as a purchase business combination. The excess of the purchase price over the fair market value of the assets acquired and assumed liabilities has been allocated to goodwill ($831,000), which was being amortized over a period of three years, the expected estimated period of benefit. We subsequently transferred this acquired business to the former management of its India.com subsidiary. As part of the transaction, the transferred business assumed all of the liabilities of the transferred business and certain liabilities of India.com. In consideration for the assumption of these liabilities, we contributed to the transferred business immediately prior to the sale in January 2002 56,075 shares of Class A common stock valued at $0.3 million and $300,000 in cash.
On November 24, 1999, we acquired iFan, Inc. ("iFan"), which owns various domain names. The acquisition has been accounted for as an acquisition of assets. iFan had limited operations. We issued 7,270 shares of our Class A common stock valued at approximately $1.6 million. The value was determined by using the average of our Class A common stock around the closing date, which occurred simultaneously with the announcement date. In addition, all outstanding iFan, stock options were converted into 1,697 non-qualified stock options of EasyLink at a weighted-average exercise price of $114.10 per share. The value ascribed to the options using the Black Scholes pricing model ($370,000) was part of the $2.1 million purchase price. The excess of the purchase price over the net book value of the domain assets acquired of iFan has been allocated to other intangible assets (non-compete agreements). Such amount was being ratably amortized over a period of three years. In December 2000, we wrote off $160,000 of domain names as part of our restructuring program. Please see the Restructuring section below for additional information.
RESULTS OF OPERATIONS - 2002 and 2001
Revenues
Revenues in 2002 were $114.4 million as compared to $123.9 million in 2001. The decrease of $9.5 million occurred even though revenues from our acquisition of STI in 2001, including the EasyLink Services business acquired by STI from AT&T Corp., were included for the full year 2002 as compared to the shorter 2001 period from February 23, 2001, the date of acquisition, through December 31, 2001. The decrease in 2002 revenues was partially due to lower volumes associated with our production messaging services and negotiated customer price reductions. Also impacting comparative results were (1) a decrease in advertising revenues of $1.6 million as a result of the sale of our advertising network in March 2001 and (2) the loss of $1.5 million in email hosting revenues resulting from the termination of a hosting arrangement related to the sale of our advertising network.
Revenues for 2002 and 2001 consist almost entirely of revenues from providing information exchange services to businesses which are derived from electronic data interchange services or "EDI"; production messaging services; integrated desktop messaging services; boundary and managed email services; and other services largely consisting of legacy fax services. In 2001, $1.6 million or 2% of our revenues were from our advertising network, which included barter revenues of $0.6 million.
Cost of Revenues
Cost of revenues in 2002 decreased to $57.6 million as compared to $75.9 million in 2001. The reduction in our cost of revenues resulted in a gross profit of 50% in 2002, representing an improvement of 11 percentage points over the 2001 results of 39%. Cost of revenues consists primarily of costs directly related to the delivery of EDI, telex, fax and email messages. It includes depreciation of equipment used in our computer systems; the cost of telecommunications services including local access charges, leased network backbone circuit costs and long distance domestic and international termination charges; licensing charges for third party network software; and personnel costs associated with our systems, databases and support services. In addition, as it related to our advertising network in 2001, we included the cost of barter trades.
The reduction in cost of revenues in 2002, both in total amount and as a percentage of revenues, and the increase in gross profit percentage, is attributable to the increase in higher margin revenues from the STI acquisition, including the EasyLink Services business, the on-going benefit of cost reduction programs implemented throughout 2001 and 2002; $3.3 million of reduced charges for network support under the transition services agreement; $6.1 million in lower depreciation charges; negotiated costs reductions in certain telecommunications services; and the elimination of $2.0 million of costs associated with our advertising network business that was sold in March 2001.
Sales and Marketing Expenses
Sales and marketing expenses were $20.2 million in 2002 as compared to $28.2 million for 2001, representing a decrease of $7.9 million. In 2001 the Company recognized $1.6 million in gains related to favorable advertising and marketing cost settlements which were recorded as a reduction of our sales and marketing expenses in 2001. Without these net cost reductions in 2001, sales and marketing expenses for 2002 in comparison to 2001 would have decreased by $9.5 million. The decrease from year to year was primarily due to eliminating $4.1 million in costs associated with our advertising network business that was sold on March 31, 2001; $2.9 million in reduced domestic employee related sales expenses; and $0.7 million in reduced advertising spending. Included in this category are costs related to salaries and commissions for sales, marketing and business development personnel and costs associated with various campaigns mostly conducted in 2001 to build our brand.
General and Administrative Expenses
General and administrative expenses were $28.7 million during 2002 as compared to $41.4 million during 2001. The $12.7 million decrease was primarily attributable to $1.8 million in reduced charges under the TSA as support for these administrative functions from AT&T ceased in 2001; $2.0 million in reduced costs for consultants without a corresponding increase in salaries and related costs; the reversal of $0.6 million of prior years' accrued employee cash bonuses in 2002 and a decrease of $3.4 million in our provision for doubtful accounts for 2002 as compared to 2001 due to enhanced billing and collection efforts. General and administrative expenses primarily consist of compensation and other employee costs for corporate office functions, customer support and customer billing operations. This cost category also includes our provision for doubtful accounts and corporate wide overhead expenses.
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 $7.4 million in 2002 as compared to $9.2 million in 2001. The prior year's costs were significantly higher as the first quarter of 2001 included the development expenses related to our advertising network, which we sold on March 31, 2001 and we utilized consultants to a greater degree during 2001.
Amortization of Goodwill and Other Intangible Assets and Impairment of Intangible Assets
Amortization of intangible assets decreased to $6.8 million in 2002 as compared to $52.1 million in 2001 as a result of the adoption of SFAS No. 142 - "Goodwill and Other Intangible Assets". This standard eliminates goodwill amortization upon adoption and requires an initial assessment for goodwill impairment within six months of adoption and at least annually thereafter. For the year ended December 31, 2001, goodwill amortization from continuing operations was $43.1 million or $2.57 per share and $3.9 million or $0.23 per share from discontinued operations.
The following unaudited pro forma disclosure presents the adoption of Statement 142 as if it had occurred at the beginning of all periods presented:
Although SFAS No. 142 requires disclosure of these amounts to reflect the impact of adoption on the Company's results for the years ending December 31, 2001 and 2000, had goodwill not been amortized and been added back, the effect would have resulted in additional impairment charges being recorded in each of the respective years.
In connection with the adoption of Statement 142 on January 1, 2002, we reclassified $3.6 million in net book value associated with assembled workforce to goodwill.
Upon initial adoption, we completed an assessment with the assistance of an independent appraiser and determined that there was no impairment.
In connection with our annual assessment in the fourth quarter of 2002, a third party impairment assessment was completed which indicated that there was an impairment of goodwill. The current economic and market conditions have led to forecasts with lower growth rates and a significantly lower market cap for the Company. Accordingly, a fair value analysis was performed on the Company's goodwill, other intangible assets and other long lived assets. This resulted in an aggregate impairment of $78.8 million which is included in the 2002 loss from continuing operations which is attributable to current economic and market conditions. In 2001, we recorded $62.2 million in goodwill impairment charges associated with our NetMoves and professional services acquisitions. The impairment charges in 2001 resulted from our previously employed business review process, based on quantitative and qualitative measures, and the assessment of the need to record impairment losses on long-lived assets used in operations when impairment indicators are present.
Restructuring Charges
During 2002 and 2001, restructuring charges of $2.3 million and $25.3 million, respectively were recorded by us in accordance with the provisions of EITF 94-3, and Staff Accounting Bulletin 100. During 2002, our restructuring charges were related to the relocation and consolidation of our New Jersey-based corporate office facilities into one location and a similar consolidation of our office facilities in England. For 2001, our restructuring initiatives were related to our strategic decisions to exit the consumer messaging business and to focus on our outsourced messaging business. The 2001 restructuring program also included an incremental reduction in the workforce of approximately 150 employees resulting in a restructuring charge of approximately $1.2 million. In addition, asset disposals of $24.1 million reflect write-downs of excess fixed assets and other assets to their net realizable values.
Gain or loss on the sale of businesses
Gains on sales of businesses in 2002 included $300,000 attributable to the sale of our customer contracts for hosted email services (NIMS) and $126,000 attributable to the sale of a software and consulting business in Europe. Loss on sale of businesses of $1.8 million in 2001 represents the loss incurred from the sale of our advertising network in March 2001.
Other Income (Expense), Net
Other income (expense), net includes interest income from our cash investments and marketable securities; interest expense related to our 7% Convertible Note offering, other notes payable and capital lease obligations; gains on debt restructuring and settlements; and gains, losses and impairment charges related to investments.
Interest income for the year ended December 31, 2002 was $189,000 as compared to $565,000 in 2001. The decrease in 2002 was principally due to lower cash balances and lower interest rates.
Interest expense was $4.8 million in 2002 as compared to $10.4 million in 2001. The $5.6 million decrease was due to reductions in the total debt balances outstanding during 2002 as compared to 2001 as a result of the exchange transactions and debt restructurings completed in 2001 as described below. In addition, no interest expense is recognized on the notes issued in connection with the exchange transactions or on the restructured notes issued to AT&T and the former shareholder of STI (who became an officer and director of the Company) in accordance with FASB Statement No. 15 "Accounting by Debtors and Creditors for Troubled Debt Restructurings" (See Note 8 to the Consolidated Financial Statements).
Gain on Debt Restructuring and Settlements
2002 Transactions
On July 15, 2002, we entered into an agreement to repurchase a 12% senior convertible note and related obligations in the amount of $0.5 million for $90,000 in cash and 5,415 shares in Class A common stock, valued at approximately $6,000. This transaction was accounted for in accordance with Financial Accounting Standards Board Statement No. 15 ("FASB No.15"), "Accounting by Debtors and Creditors for Troubled Debt Restructurings." As a result of this transaction, we recorded a $0.4 million gain in 2002.
On September 27, 2002, we entered into an agreement to repurchase 10% senior convertible notes in the amount of $4.95 million for $495,000. This transaction was accounted for in accordance with FASB No.15), "Accounting by Debtors and Creditors for Troubled Debt Restructurings." As a result of this transaction, we recorded a $6.2 million gain in 2002 which includes the impact of a $1.7 million reversal of capitalized interest previously recognized in connection with the February 14, 2001 exchange agreement related to such notes.
2001 Transactions
Gain on debt restructuring in 2001 primarily relates to the issuance of $23.8 million principal amount of 10% Senior Convertible Notes in exchange for the cancellation of $75.9 million principal amount of 7% Convertible Subordinated Notes and the subsequent exchange of $2.5 million of the new 10% Senior Convertible Notes for 1.4 million shares of our Class A Common Stock. In accordance with FASB No. 15, "Accounting by Debtors and Creditors for Troubled Debt Restructuring" ("FASB No. 15"), we recorded gains of $40.4 million on these exchange transactions.
During the third quarter of 2001, pending the completion of the subsequent restructuring referred to below, we issued $16.3 million of interim notes, bearing interest at a rate of 12% per annum, in exchange for present and future lease obligations in the amount of $15.1 million. These notes were cancelled upon completion of the fourth quarter debt restructuring. This interim transaction resulted in a loss of $1.1 million in accordance with FASB No. 15.
We also recorded net gains of $8.6 million upon the completion in November 2001 of the restructuring of certain debt and lease obligations in accordance with FASB No. 15. Approximately $63.0 million of debt and equipment lease obligations were exchanged for approximately $20.0 million of 12% restructured notes due in installments from June 2003 through June 2006, 2.0 million shares of Class A common stock valued at $6.10 per share and warrants to purchase 1.8 million of shares of Class A common stock valued at $6.10 per share.
The restructure notes bear interest at a rate of 12% per annum and mature five years from the date of the debt restructuring. We may elect to defer payment of accrued interest on a portion of the restructure notes until various dates commencing June 2003 and may elect to pay accrued interest on other restructure notes in shares of Class A common stock having a market value at the time of payment equal to 120% of the interest payment due.
The restructure notes issued to AT&T Corp. and the former shareholder of STI have been accounted for in accordance with FASB No. 15, "Accounting by Debtors and Creditors for Troubled Debt Restructurings." Because the total future cash or share payments specified by the terms of these restructure notes, including both payments designated as interest and those designated as principal, are less than the carrying amount of these restructure notes, the Company was required to reduce the carrying amount of the original notes exchanged for the restructure notes issued to AT&T and such former STI shareholder to an amount equal to the total future cash payments specified by the new terms. In future periods, all payments under the terms of the restructure notes for which future interest was included in the carrying amounts of such notes shall be accounted for as reductions of such carrying amounts, and no interest expense shall be recognized on such notes for any period between the respective dates of commencement of the accrual of interest on such notes and the maturity dates of such notes.
The $7.8 million gain recorded on the debt restructuring was calculated based on the amount of the total reduction in carrying values of the original restructure obligations as compared to the carrying values of the restructure notes minus the amount of the contingent share issuance obligation of $1.1 million recorded by us due to the assumed payment of interest on a portion of the restructure notes in shares of Class A common stock as described above.
Impairment of Investments
As indicated above, management performs on-going business reviews and, based on quantitative and qualitative measures, assesses the need to record impairment losses on its investments when impairment indicators are present. Management determined that the decline in value of its cost investments in Bantu, Inc., BulletN.net and OnView was other-than-temporary and recorded charges of $1.5 million and $10.1 million for the years ended December 31, 2002 and 2001, respectively.
Discontinued Operations
In 2001, the loss from discontinued operations includes the results and other costs related to our discontinuance of our World.com business including subsidiaries, Asia.com, Inc. and India.com Inc. The $63.0 million loss from discontinued operations included a write-down of $56.4 million of assets, primarily goodwill, to net realizable value, operating losses of $4.5 million, severance and related benefits of $1.3 million and other related costs and expenses including the closure of facilities of $0.8 million. In 2000, the loss from discontinued operations included $58.4 million of operating losses and $12.2 million of write-downs of goodwill and other intangible assets in connection with the decision to abandon two of World.com's Asian based businesses.
Extraordinary Gain
During July 2001, we acquired the assets of GN Comtext ("GN") for $1. Additionally, we received a $1.1 million unsecured interest free loan from the former parent company of GN, GN Store Nord A/S, which was paid in the fourth quarter of 2001, and received approximately $175,000 for transition services which were recorded as a reimbursement of costs during the third quarter of 2001 and will collect and retain a percentage of certain accounts receivable collected on behalf of GN. GN offers value-added messaging services to over 3,000 customers ranging from small business to multi-national companies around the world. The excess of fair market value of the assets acquired and the liabilities assumed over the purchase price resulted in negative goodwill of $782,000 which was recognized as an extraordinary gain , in accordance with the provisions of FASB Statement No. 141," Business Combinations."
RESULTS OF OPERATIONS - 2001 and 2000
Revenues
Revenues in 2001 were $123.9 million as compared to $52.7 million in 2000. The increase of $71.2 million was due primarily to revenues from our acquisition of STI on February 23, 2001, including the EasyLink Services business acquired by STI from AT&T Corp. The increased revenues from the acquisition were partially offset by reductions in our advertising network revenues as a result of the sale of the advertising network in March 2001.
Business messaging revenues for the year ended December 31, 2001 were $121.7 million as compared to $29.0 million in 2000. Business messaging includes revenues derived from message delivery services such as electronic data interchange or "EDI", telex, desktop fax, broadcast and production messaging; managed e-mail and groupware hosting services; and services that protect corporate e-mail systems such as virus protection, spam control and content filtering.
Advertising network revenues, including subscription services and domain name sales, amounted to $2.2 million in 2001 as compared to $23.7 million in 2000. The significant decrease in these revenues in 2001 is attributable to the sale of our advertising network in March 2001. Included in advertising network revenues are barter revenues of $0.6 million and $4.3 million for the years ended December 31, 2001 and 2000, respectively.
Cost of Revenues
Cost of revenues increased in the year ended December 31, 2001 to $75.9 million as compared to $49.2 million in 2000. The increase in 2001 over 2000 was the result of increased revenues but as a percentage of revenues these costs decreased, particularly in 2001 with the inclusion of higher margin revenues from the acquisition of STI, including the EasyLink Services business. Gross margin in 2001 improved to 39% as compared to 7% in 2000.
Cost of revenues consists primarily of costs directly related to the delivery of EDI, telex, fax and email messages. It includes depreciation of equipment used in our computer systems; the cost of telecommunications services including local access charges, leased network backbone circuit costs and long distance domestic and international termination charges; licensing charges for third party network software; and personnel costs associated with our systems, databases and support services. In addition, as it related to our advertising network, we included the cost of barter trades.
Sales and Marketing Expenses
Sales and marketing expenses were $28.2 million in 2001 as compared to $52.1 million in 2000. In 2001, these costs primarily relate to business messaging but in 2000, the most significant costs were related to our advertising network. Accordingly, the $23.8 million decrease in 2001 is primarily due to the reduction and eventual elimination of advertising network expenditures in anticipation of and the eventual sale of that business in March 2001. Partially offsetting this cost reduction was an increase in sales and marketing expenses for business messaging in support of the expanded business from the STI/EasyLink Services acquisition in February 2001. The costs for business messaging primarily consist of salaries, commissions and other related expenses for sales, marketing and business development employees, third party agent commissions and payments to marketing consultants.
General and Administrative Expenses
General and administrative expenses were $41.4 million in 2001 as compared to $32.8 million in 2000. The $8.3 million increase was attributable to increased personnel and other costs in connection with the expanded business from the STI/EasyLink Services acquisition in February 2001. General and administrative expenses consist primarily of compensation and other employee costs including customer support, customer billing operations and other corporate functions as well our provision for doubtful accounts and overhead expenses.
Product Development Expenses
Product development costs were $9.2 million in 2001 as compared to $17.1 million in 2000. In 2001 product development costs relate exclusively to business messaging as development for the advertising network was eliminated with our decision to sell that business. Product development costs consist primarily of personnel and consultants' time and expense to research, conceptualize, and test product launches and enhancements to all messaging products.
Amortization of Goodwill and Other Intangible Assets, Write-Off of Acquired In-Process Technology and Impairment of Intangible Assets
Goodwill represents the excess of the purchase price of acquisitions over the fair market value of the net assets acquired and was being amortized over a 3 to 5 year period through December 31, 2001. Amortization of goodwill and other intangible assets increased to $52.1 million in 2001 as compared to $40.0 million in 2000 largely as a result of the goodwill amortization related to the STI/EasyLink acquisition in February 2001.
The write-off of $7.7 million of acquired in-process technology was attributable to the NetMoves transaction in 2000.
Impairment of intangible assets of $62.2 million included the write-offs of $60 million and $2.2 million of goodwill associated with the NetMoves and professional services acquisitions, respectively, as an impairment charge in 2001. The impairment charge in 2001 resulted from our on-going business review, based on quantitative and qualitative measures, and assessment of the need to record impairment losses on long-lived assets used in operations when impairment indicators are present. Management determined the amount of the impairment charge by comparing the carrying value of goodwill and other long-lived assets to their fair values. These evaluations of impairments are based upon an achievement of business plan objectives and milestones of each business, the fair value of each ownership interest relative to its carrying value, the financial condition and prospects of the business and other relevant factors. The business plan objectives and milestones that are considered include among others, those related to financial performance, such as achievement of planned financial results and completion of capital raising activities, if any, and those that are not primarily financial in nature, such as launching or enhancements of a web site or product, the hiring of key employees, the number of people who have registered to be part of the associated business' web community, and the number of visitors to the associated business' web site per month. Management determines fair value based on a combination of the discounted cash flow methodology, which is based on converting expected cash flows to present value and the market approach, which includes analysis of market price multiples of companies engaged in lines of business similar to the business being evaluated. The market price multiples are selected and applied to the business based on the relative performance, future prospects and risk profile of the business in comparison to the guideline companies.
Restructuring Charges
During 2001 and 2000, restructuring charges of $25.3 million and $5.3 million, respectively, were recorded by us in accordance with the provisions of EITF 94-3, and Staff Accounting Bulletin 100. Our 2001 restructuring initiatives are related to our strategic decisions to exit the consumer messaging business and to focus on the Company's outsourced messaging business. During 2001, the Company's restructuring program included an incremental reduction in the workforce of approximately 150 employees. Employees affected by the restructuring were notified by direct personal contact and by written notification. The remaining employee benefit termination amounts were paid out in 2002. In addition, asset disposals of $24.1 million reflect write-downs of excess fixed assets and other assets to their net realizable values. The lease abandonments represent the cost to exit the facility leases. The remaining amounts are to be paid out over the next 3 years which corresponds to the terms of the lease.
Loss on Sale of Businesses
Loss on sale of businesses of $1.8 million represents the loss incurred from the sale of our advertising network in March 2001.
Other Income (Expense), Net
Other income (expense), net includes interest income from our cash investments and marketable securities; interest expense related to our 7% Convertible Note offering, other notes payable and capital lease obligations; and gains, losses and impairment charges related to investments.
Interest income for the year ended December 31, 2001 was $0.6 million as compared to $4.7 million in 2000. The decrease in 2001 was principally due to lower cash balances and lower interest rates.
Interest expense was $10.4 million in 2001 as compared to $9.8 million in 2000. Although interest expense remained relatively consistent in 2001 as compared to 2000, the $0.6 million increase represents the net effect of additional interest charges in 2001 on debt obligations related to the STI acquisition and reduced interest charges on our 7% Convertible Notes as a result of exchange transactions on $75.9 million of the 7% Convertible Notes for $23.8 million of 10% Senior Convertible Notes and from the non-recognition of interest expense on the new notes in accordance with FASB No. 15.
Gain on Debt Restructuring and Settlements
Gain on debt restructuring in 2001 primarily relates to the issuance of $23.8 million principal amount of 10% Senior Convertible Notes in exchange for the cancellation of $75.9 million principal amount of 7% Convertible Subordinated Notes and the subsequent exchange of $2.5 million of the new 10% Senior Convertible Notes for 1.4 million shares of our Class A Common Stock. In accordance with FASB No. 15, we recorded gains of $40.4 million on these exchange transactions.
During the third quarter of 2001, pending the completion of the subsequent restructuring referred to below, we issued $16.3 million of interim notes, bearing interest at a rate of 12% per annum, in exchange for present and future lease obligations in the amount of $15.1 million. These notes were cancelled upon completion of the fourth quarter debt restructuring. This interim transaction resulted in a loss of $1.1 million in accordance with FASB No. 15.
We also recorded net gains of $8.6 million upon the completion in November 2001 of the restructuring of certain debt and lease obligations in accordance with FASB No. 15. Approximately $63.0 million of debt and equipment lease obligations were exchanged for approximately $20.0 million of 12% restructured notes due in installments from June 2003 through June 2006, 2.0 million shares of Class A common stock valued at $6.10 per share and warrants to purchase 1.8 million of shares of Class A common stock valued at $6.10 per share.
The restructure notes bear interest at a rate of 12% per annum and mature five years from the date of the debt restructuring. We may elect to defer payment of accrued interest on a portion of the restructure notes until various dates commencing June 2003 and may elect to pay accrued interest on other restructure notes in shares of Class A common stock having a market value at the time of payment equal to 120% of the interest payment due.
The restructure notes issued to AT&T Corp. and the former shareholder of STI have been accounted for in accordance with FASB No. 15, "Accounting by Debtors and Creditors for Troubled Debt Restructurings." Because the total future cash or share payments specified by the terms of these restructure notes, including both payments designated as interest and those designated as principal, are less than the carrying amount of these restructure notes, the Company was required to reduce the carrying amount of the original notes exchanged for the restructure notes issued to AT&T and such former STI shareholder to an amount equal to the total future cash payments specified by the new terms. In future periods, all payments under the terms of the restructure notes for which future interest was included in the carrying amounts of such notes shall be accounted for as reductions of such carrying amounts, and no interest expense shall be recognized on such notes for any period between the respective dates of commencement of the accrual of interest on such notes and the maturity dates of such notes.
The $7.8 million gain recorded on the debt restructuring was calculated based on the amount of the total reduction in carrying values of the original restructure obligations as compared to the carrying values of the restructure notes minus the amount of the contingent share issuance obligation of $1.1 million recorded by us due to the assumed payment of interest on a portion of the restructure notes in shares of Class A common stock as described above.
Impairment of Investments
As indicated above, management performs on-going business reviews and, based on quantitative and qualitative measures, assesses the need to record impairment losses on its investments when impairment indicators are present. Management determined that the decline in value of its cost investments in Bantu, Inc., BulletN.net and On View was other-than-temporary and recorded charges of $10.1 million for the year ended December 31, 2001. In 2000, as a result of sequential declines in the operating results of 3Cube, management made an assessment of the carrying value of its equity investment and determined that it was in excess of its estimated fair value. Consequently, we wrote down our investment and recorded an impairment charge of $200,000 in 2000.
Discontinued Operations
The loss from discontinued operations includes the results and other costs related to the discontinuance of our World.com business including subsidiaries, Asia.com, Inc. and India.com, Inc. In 2001, the $63.0 million loss from discontinued operations included a write-down of $56.4 million of assets, primarily goodwill, to net realizable value, operating losses of $4.5 million, severance and related benefits of $1.3 million and other related costs and expenses including the closure of facilities of $0.8 million. In 2000, the loss from discontinued operations included $58.4 million of operating losses and $12.2 million of write-downs of goodwill and other intangible assets in connection with the decision to abandon two of World.com's Asian based businesses.
Extraordinary Gain
During July 2001, we acquired the assets of GN Comtext ("GN") for $1. Additionally, we received a $1.1 million unsecured interest free loan from the former parent company of GN, GN Store Nord A/S, which was paid in the fourth quarter of 2001, and received approximately $175,000 for transition services which were recorded as a reimbursement of costs during the third quarter of 2001 and will collect and retain a percentage of certain accounts receivable collected on behalf of GN. GN offers value-added messaging services to over 3,000 customers ranging from small business to multi-national companies around the world. The excess of fair market value of the assets acquired and the liabilities assumed over the purchase price resulted in negative goodwill of $782,000 which was recognized as an extraordinary gain, in accordance with the provisions of FASB Statement No. 141, "Business Combinations."
Liquidity and Capital Resources
Since our inception, we have obtained financing through private placements of convertible debt and equity securities, equipment leases, our initial public offering and through a convertible debt offering. In January 2000, we received net proceeds of $96.1 million from our convertible debt offering. During the first three quarters of 2001, we raised approximately $14.1 million from the issuance of 10% Senior Convertible Notes and $3.0 million from the issuance of Class A common stock. In the fourth quarter of 2001, we raised an additional $7.1 million. Of the $7.1 million, $5.7 million was raised through the issuance of 1,460,000 shares of Class A common stock and $1.3 million was raised through the issuance of senior convertible notes. These notes are convertible at $2.50 per share. The beneficial conversion feature of $1.1 million is being amortized over 5 years. See Note 8 Notes Payable. We also financed the majority of our capital expenditures in 2000 and 1999 through lease lines. In 2002, we did not obtain any new financings.
The $7.1 million raised in the fourth quarter of 2001, along with certain stock issuances in lieu of payment of outstanding liabilities, enabled us to meet a $10 million financing requirement for the restructuring of approximately $63 million of debt and capital lease obligations. The restructuring substantially improved our liquidity. The $63 million of debt and capital lease obligations were exchanged for approximately $20 million principal amount of new notes, 1.97 million shares of Class A common stock valued at $12.0 million and warrants to purchase 1.8 million shares of Class A common stock valued at $6.10 per share. The new notes issued in the restructuring are payable in installments commencing June 2003 and extending through June 2006. Interest on the new notes started accruing from various dates commencing June 1, 2001 and payments of interest are either deferred until June 2003 or later or are payable in Class A common stock. See Note 8 - Notes Payable. As part of the restructuring, we also settled certain lease equipment obligations having an original cost of $22.5 million and satisfied certain other obligations for approximately $3.7 million in cash and approximately 820,000 shares of Class A common stock valued at $0.5 million.
Net cash provide from or (used in) operations was $1.7 million for the year ended December 31, 2002, $(1.4) million for the year ended December 31, 2001 and $(76.3) million for the year ended December 31, 2000. The results in 2002 and 2001 in comparison to 2000 reflect the change in business strategy pursuant to which we acquired STI, including the EasyLink Services business, and sold our advertising network business in the first quarter of 2001.
Net cash used in investing activities was $3.1 million, $3.2 million and $12.8 million in 2002, 2001 and 2000 respectively. In 2002 cash was used for capital equipment purchase of $3.5 million net of $0.4 million of proceeds from the sales of businesses. For 2001, cash used for capital equipment purchases amounted to $5.3 million and cash used for acquisitions, mostly related to the STI transaction, was $15.3 million. Offsetting these 2001 uses were $12.5 million in proceeds from the sales and maturities of marketable securities, $2.0 million from the sales of investments and $4.6 million from the sales of businesses. In 2000 capital equipment purchases amounted to $5.3 million, net purchases of marketable securities amounted to $5.3 million and other activities accounted for the balance of $2.2 million of cash used for investing activities.
Net cash (used in) or provided from financing activities was $(1.9) million for the year ended December 31, 2002 in comparison to $16.7 million and $85.7 million for the years ended December 31, 2001 and 2000. As described above we obtained substantial financing in 2000 and 2001 but none in 2002. Payments for debt service and capital leases, representing the more significant cash used for financing activities amounted to $2.3 million in 2002, $9.1 million in 2001 and $13.2 million in 2000.
As of December 31, 2002, our major commitments consist of $24.1 million principal amount of 7% Convertible Subordinated Notes due in February 2005; $31 million principal amount of 10% Senior Convertible Notes due in January 2006; and $19.1 million principal amount of 12% restructure notes payable in 13 equal quarterly installments beginning in June 2003. A portion of the restructure notes are also subject to mandatory prepayments out of a portion of the proceeds of future financings by us. Our capital lease and operating lease commitments for 2003 are approximately $3.6 million. Our cash interest payment obligations are approximately $4.5 million during 2003 and our scheduled principal repayment obligations are approximately $3.6 million during 2003, in each case after giving effect to the elimination of debt on or before March 31, 2003 but without giving effect to the elimination of any debt after March 31, 2003. We also have minimum purchase commitments to telecommunications services providers. See Part I, Item 1 "Business Description--Telecommunications Services."
For each of the years ended December 31, 2002, 2001 and 2000, we received a report from our independent accountants containing an explanatory paragraph stating that we suffered recurring losses from operations since inception and have a working capital deficiency that raise substantial doubt about our ability to continue as a going concern. 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. We believe our ability to continue as a going concern is dependent upon our ability to generate sufficient cash flow to meet our obligations on a timely basis, to obtain additional financing or refinancing as may be required, to restructure our debt service obligations and ultimately to achieve profitable operations. Throughout 2001, management improved the Company's operations and liquidity through a variety of actions, including the acquisition and integration of STI/EasyLink Services, a reduction of its workforce, the sale or closure of all of its World.com businesses, and the sale of its advertising network. In addition, management successfully raised over $20 million in cash financing during 2001. In 2002, management continued the process of improving the Company's operations through further cost reductions to the point that net cash of $1.7 million was provided from operations for the year.
During 2003, the Company plans to continue the efforts that it implemented successfully throughout 2002 and 2001 to manage its costs and liabilities with a view to ensuring our continued liquidity and to restructure its debt. We may also seek complementary acquisitions and, if necessary, to raise additional financing. We are also considering whether to pursue other strategic alternatives, including potential business combinations. There can be no assurance that the Company will be successful in these efforts. Sales of additional equity securities could result in additional dilution to our stockholders. In addition, on an ongoing basis, we continue to evaluate potential acquisitions to complement our information exchange services or other business combination transactions. In order to complete these potential acquisitions, we may need additional equity or debt financing in the future.
We recently announced that we are seeking to eliminate substantially all of our indebtedness for borrowed money. Pursuant to these efforts, we have eliminated approximately $7.1 million principal amount of debt after December 31, 2002 through the date hereof in exchange for the payment of approximately $0.8 million in cash and the issuance or commitment to issue approximately 1.1 million shares of our Class A common stock. These transactions will result in a gain of approximately $6.6 million which will be recorded in the first quarter of 2003. As a result of this transaction, the Company also eliminated $0.7 million of capitalized interest and $0.2 million of accrued interest associated with the debt eliminated. We may issue additional shares or securities convertible into or exercisable for shares of Class A common stock in connection with raising any capital needed to fund cash payments for any additional debt that we may eliminate. Upon elimination of any additional indebtedness, we would also eliminate the capitalized interest and accrued interest associated with the debt eliminated. Holders of substantially all indebtedness on which we currently owe accrued but unpaid interest payments have agreed to defer such payments pending completion of our proposed debt restructuring in most cases until April 30, 2003 or May 31, 2003.
We cannot assure you that we will be able to successfully complete the elimination of any other indebtedness that we are seeking to eliminate on favorable terms or at all. On February 27, PTEK Holdings, Inc., one of our principal competitors, announced that it had entered into an agreement with AT&T to purchase 1,423,980 shares of outstanding Class A common stock of EasyLink held by AT&T and a promissory note of EasyLink held by AT&T. The promissory note, with a principal amount of $10 million, represents approximately 13% of the aggregate principal amount of debt that EasyLink has been seeking to eliminate pursuant to its debt restructuring plan. In response to PTEK's announcement, we commenced on March 17, 2003 an action against AT&T Corp., PTEK Holdings, Inc. and PTEK's subsidiary Xpedite Systems, Inc. The suit seeks, among other things, to enjoin AT&T from selling the EasyLink promissory note held by AT&T to PTEK, to compel AT&T to participate in EasyLink's current debt restructuring and to enjoin Xpedite and PTEK from contacting EasyLink's creditors and making false statements to EasyLink's customers and creditors regarding EasyLink and its financial position. EasyLink believes that if the sale of the note to PTEK is permitted to occur, EasyLink's current debt restructuring may be at substantial risk.
If we are unable to complete the elimination of debt pursuant to our proposed debt restructuring on favorable terms, we cannot assure you that we will be able to pay interest and other amounts due on our outstanding indebtedness, or our other obligations, on the scheduled dates or at all. If our cash flow and cash balances are inadequate to meet our obligations, we could face substantial liquidity problems. If we are unable to generate sufficient cash flow or otherwise obtain funds necessary to make required payments, or if we otherwise fail to comply with any covenants in our indebtedness, we would be in default under these obligations, which would permit these lenders to accelerate the maturity of the obligations and pursue other remedies thereunder and could cause defaults under our indebtedness. Any such default could have a material adverse effect on our business, results of operations and financial condition. We cannot assure you that we would be able to repay amounts due on our indebtedness if payment of the indebtedness were accelerated following the occurrence of an event of default under, or certain other events specified in, the agreements governing our outstanding indebtedness and capital leases, including any deemed sale of all or substantially all of our assets.
Recent Accounting Pronouncements
In June 2001, Statement of Financial Accounting Standards No. 143, "Accounting for Asset Retirement Obligations" ("Statement 143") was issued. Statement 143 addresses financial accounting and reporting for legal obligations associated with the retirement of tangible long-lived assets and the associated retirement costs that result from the acquisition, construction, or development and normal operation of a long-lived asset. Upon initial recognition of a liability for an asset retirement obligation, Statement 143 requires an increase in the carrying amount of the related long-lived asset. The asset retirement cost is subsequently allocated to expense using a systematic and rational method over the asset's useful life. Statement 143 is effective for fiscal years beginning after June 15, 2002. The adoption of this statement is not expected to have a material impact on the Company's financial position or results of operations.
In April 2002, Statement of Financial Accounting Standards No. 145, "Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections" ("Statement 145") was issued. FASB Statement No. 4 required all gains and losses from the extinguishment of debt to be reported as extraordinary items and Statement No. 64 related to the same matter. Statement 145 requires gains and losses from certain debt extinguishment to not be reported as extraordinary items when the use of debt extinguishment is part of the risk management strategy. Statement 44 was issued to establish transitional requirements for motor carriers relative to intangible assets. Those transitions are completed, therefore Statement 44 is no longer necessary. Statement 145 also amends Statement No. 13 requiring sale-leaseback accounting for certain lease modifications. Statement 145 is effective for fiscal years beginning after May 15, 2002. The provisions relating to sale-leaseback are effective for transactions after May 15, 2002. The Company adopted Statement 145 effective July 1, 2002. The adoption of this Statement resulted in gains from debt restructuring and extinguishments of debt that were previously recorded as extraordinary being reclassified as operating activities. During the quarter ended September 30, 2002, the gains from extinguishment of debt were recorded as part of continuing operations in accordance with Statement 145. The following sets forth the impact of the reclassifications on the income (loss) from continuing operations and earnings per share from continuing operations:
In July 2002, Statement of Financial Accounting Standards No. 146, "Accounting for Costs Associated with Exit or Disposal Activities" ("Statement 146") was issued. This Statement addresses financial accounting and reporting for costs associated with exit or disposal activities and nullifies Emerging Issues Task Force Issue ("EITF") 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)." The principal difference between Statement 146 and EITF 94-3 relates to the timing of liability recognition. Under Statement 146, a liability for a cost associated with an exit or disposal activity is recognized when the liability is incurred. Under EITF 94-3, a liability for an exit cost was recognized at the date of an entity's commitment to an exit plan. The provisions of Statement 146 are effective for exit or disposal activities that are initiated after December 31, 2002. The adoption of this statement is not expected to have a material impact on the Company's financial position or results of operations.
Item 7A
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 England) and, to a lesser extent, in Singapore and Malaysia. 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 receivables are subject, in the normal course of business, to collection risks. We regularly assess these risks and have established policies and business practices to protect against the adverse effects of collection risks. As a result we do not anticipate any material losses in this area.
Interest Rate Risk - Interest rate risk refers to fluctuations in the value of a security resulting from changes in the general level of interest rates. Investments that are classified as cash and cash and equivalents have original maturities of three months or less. Changes in the market's interest rates do not affect the value of these investments.
Item 8
Item 8 Consolidated Financial Statements and Supplementary Data
EASYLINK SERVICES CORPORATION
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
INDEPENDENT AUDITORS' REPORT
The Board of Directors EasyLink Services Corporation:
We have audited the accompanying consolidated balance sheets of EasyLink Services Corporation and subsidiaries as of December 31, 2002 and 2001, and the related consolidated statements of operations, stockholders' (deficit) equity and comprehensive loss, and cash flows for each of the years in the three-year period ended December 31, 2002. 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 auditing standards generally accepted in the United States of America. 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, 2002 and 2001, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2002 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 suffered recurring losses from operations since inception and has a working capital deficiency and stockholders' deficit that raise substantial doubt about its ability to continue as a going concern. Management's plans in regard to these matters 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.
As discussed in Note 1(k), note 1(t), and 7, the Company adopted Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets" and Statement of Financial Accounting Standards No. 145, "Rescission of FASB Statements No. 4, 44 and 64, and Amendment of FASB Statement No. 13, Technical Corrections" in the year ended December 31, 2002.
/s/KPMG LLP
New York, New York February 27, 2003
EasyLink Services Corporation
CONSOLIDATED BALANCE SHEETS (In thousands, except share and per share data)
See accompanying notes to consolidated financial statements.
EasyLink Services Corporation
CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands, except share and per share data)
See accompanying notes to consolidated financial statements.
EasyLink Services Corporation
CONSOLIDATED STATEMENT OF STOCKHOLDERS' (DEFICIT) EQUITY AND COMPREHENSIVE LOSS
See accompanying notes to consolidated financial statements.
EasyLink Services Corporation
Statement of Stockholders' Equity (Deficit) and Comprehensive Loss (continued)
See accompanying notes to consolidated financial statements.
EasyLink Services Corporation
Statement of Stockholders' Equity (Deficit) and Comprehensive Loss (continued) (in thousands, except share data)
EasyLink Services Corporation
CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands)
Supplemental disclosure of non-cash information:
During the years ended December 31, 2002, 2001 and 2000, the Company paid approximately $3.1 million, $6.5 million and $6.7 million, respectively, for interest. Through the issuance of 888,810 and 294,533 shares of Class A common stock, the Company paid approximately $1.83 million and $640,000 in interest for the year ended December 31, 2002 and 2001, respectively.
During the year ended December 31, 2002 and 2001, the Company issued 98,841 and 682,234 shares, respectively, of its Class A common stock valued at approximately $524,000 and $4.4 million, respectively, in connection with certain settlement obligations.
During the year ended December 31, 2002 and 2001, the Company issued 127,550 and 196,000 shares, respectively, of its Class A common stock valued at approximately $182,000 and $1.2 million in settlement of vendor obligations.
Non-cash investing activities:
During the year ended December 31, 2001 and 2000, the Company issued 22,222 and 16,523 shares, respectively, of its Class A common stock in connection with certain investments. These transactions resulted in a non-cash investing activities of $.4 million and $14.0 million, respectively (see Note 6). During the year ended December 31, 2001 and 2000, the Company issued 1,896,218 and 1,259,035 shares, respectively, of its Class A common stock plus stock options in connection with certain acquisitions. These transactions resulted in non-cash investing activities of $31.1 million and $249.2 million, respectively (see Note 2). During the year ended December 31, 2000, the Company purchased an equity interest in an Internet company by issuing 25,505 shares of Class A common stock. This transaction resulted in non-cash investing activities of $1.5 million . During the year ended December 31, 2000, the Company issued 31,644 shares of its Class A common stock in exchange for software and licenses. These transactions resulted in non-cash investing activities of approximately $2.4 million. During the year ended December 31, 2000 the Company purchased domain assets with 1,375 shares of Class A common stock. This transaction resulted in a non-cash investing activity of $117 thousand.
No shares were issued in connection with investing activities during the year ended December 31, 2002.
Non-cash financing activities:
During the year ended December 31, 2001, the Company issued 2,810,937 in connection with its debt restructuring. This resulted in non-cash financing activities of $17.1 million (see Note 7). The Company entered into various capital leases for computer equipment. These capital lease obligations resulted in non-cash financing activities aggregating $0.2 million and $16.7 million for the years ended December 31, 2001 and 2000, respectively.
See accompanying notes to consolidated financial statements.
EasyLink Services Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2002 and 2001
(1) Summary of Operations and Significant Accounting Policies
(a) Summary of Operations
On April 2, 2001, the Company changed its name to EasyLink Services Corporation. The Company offers a broad range of information exchange services to businesses and service providers, including transaction delivery services such as electronic data interchange or "EDI," telex, desktop fax, broadcast and production messaging services; managed e-mail and groupware hosting services; and services that protect corporate e-mail systems such as virus protection, spam control and content filtering services.
Until March 30, 2001, the Company also offered advertising services and consumer e-mail services to Web sites, ISP's and direct to consumers through its web site www.mail.com. On October 26, 2000, the Company announced its intention to sell its advertising network business and stated that it will focus exclusively on its established outsourced messaging business. The Company also announced that as a result of its decision to focus on its outsourced messaging business, it was streamlining the organization, taking advantage of lower cost areas and further integrating its technological and operational infrastructures. On March 30, 2001, the Company completed the sale of its advertising network and consumer e-mail business to Net2Phone. See Note 4 for additional information.
In March 2000, EasyLink formed WORLD.com to develop the Company's extensive portfolio of domain names into major Web properties, such as Asia.com and India.com, which served the business-to-business and business-to-consumer marketplace. Through its subsidiaries, WORLD.com generated revenues primarily from sales of information technology products, system integration and website development for other companies, advertising related sales and commissions earned from booking travel arrangements. On November 2, 2000, the Company announced that it would sell all assets not related to its core outsourced messaging business, including its Asia.com Inc., and India.com Inc. subsidiaries, and its portfolio of category-defining domain names. On May 3, 2001, Asia.com, Inc. sold its business to an investor group. In October 2001, the Company sold 90% of a subsidiary of India.com, Inc. and the Company has ceased conducting its portal business. Accordingly, the results of World.com and its subsidiaries have been restated as discontinued operations in our consolidated financial statements for all periods presented. See Notes 1(c) and 10 for additional information.
(b) Consolidated Results of Operations and Management's Plan.
The accompanying consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. To date, the Company has suffered recurring losses from operations since inception and has a working capital deficiency that raise substantial doubt about its ability to continue as a going concern. As shown in the accompanying consolidated financial statements, the Company incurred net losses of $85.8 million, $206.3 million and $229.5 million, respectively, for the three-year period ended December 31, 2002, has an accumulated deficit of $599.3 million as of December 31, 2002 and has a stockholders' deficit of $61.8 million as of December 31, 2002. The Company may need additional financing to meet cash requirements for its operations. If the Company is unable to generate sufficient cash flow or raise additional financing, the Company may be unable to continue as a going concern.
The accompanying consolidated financial statements do not include any adjustment relating to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that might be necessary should the Company be unable to continue as a going concern. Management believes the Company's ability to continue as a going concern is dependent upon its ability to generate sufficient cash flow to meet its obligations on a timely basis, to obtain additional financing or refinancing as may be required, and ultimately to achieve profitable operations. Throughout 2001, management improved the Company's operations and liquidity through a variety of actions, including the acquisition and integration of STI/EasyLink Services, a reduction of its workforce, the sale or closure of all of its World.com businesses, and the sale of its advertising network. In addition, management raised over $20 million in cash financing during 2001. In 2002, Management continued the process of improving the Company's operations through further cost reductions to the point that net cash of $1.7 million was provided from operations for the year. Management is continuing the process of further reducing operating costs and increasing its sales efforts and is seeking to eliminate debt. There can be no assurance that the Company will be successful in these efforts.
(c) Principles of Consolidation and Basis of Presentation
The consolidated financial statements include the accounts of the Company and its wholly-owned or majority-owned subsidiaries from the dates of acquisition. All other investments the Company does not have the ability to control or exercise significant influence are accounted for under the cost method. The interest of shareholders other than those of EasyLink is recorded as minority interest in the accompanying consolidated statements of operations and consolidated balance sheets. When losses applicable to minority interest holders in a subsidiary exceed the minority interest in the equity capital of the subsidiary, these losses are included in the Company's results, as the minority interest holder has no obligation to provide further financing to the subsidiary. All significant intercompany accounts and transactions have been eliminated in consolidation.
WORLD.com, a wholly owned subsidiary, and its majority-owned subsidiaries have been reflected as discontinued operations and prior year amounts have been reclassified to reflect such treatment (See Note 10).
Effective January 23, 2002, the Company authorized and implemented a 10-for-1 reverse stock split of all issued and outstanding stock. Accordingly, all issued and outstanding share and per share amounts in the accompanying consolidated financial statements have been retroactively restated to reflect the reverse stock split.
(d) Use of Estimates
The preparation of financial statements in accordance with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities and the reported amounts of revenues and expenses. These estimates and assumptions relate to the estimates of collectibility of accounts receivable, the realization of goodwill and other intangibles, accruals and other factors. Actual results could differ from those estimates.
(e) Cash and Cash Equivalents
The Company considers all highly liquid securities, with original maturities of three months or less when acquired, to be cash equivalents.
(f) Letter of Credit and Restricted Investment
At December 31, 2002 and 2001, the Company maintained approximately $0.3 million in letters of credit ("LC") with various parties, which are included in restricted investments in the accompanying consolidated balance sheet.
(g) Property and Equipment
Property and equipment are stated at cost. Depreciation is calculated using the straight-line method over the estimated useful lives of the related assets, generally ranging from three to five years. Property and equipment under capital leases are stated at the present value of minimum lease payments and are amortized using the straight-line method over the shorter of the lease term or the estimated useful lives of the assets. Leasehold improvements are amortized using the straight-line method over the estimated useful lives of the assets or the term of the lease, whichever is shorter.
(h) Domain Assets Held For Sale and Registration Fees
A domain name is the part of an email address that comes after the @ sign (for example, if membername@mail.com is the email address then "mail.com" is the domain name). Domain assets represent the purchase of domain names and are amortized using the straight-line method over their economic useful lives, which had been estimated to be five years. During the first quarter of 2001, the e-mail addresses for many of the domain names were sold to Net2Phone as part of the sale of the advertising network (see Note 4). The net carrying value of these assets at the time of sale was approximately $2.3 million.
All domain assets are classified as held for sale at December 31, 2002 and 2001 and are no longer being amortized.
(i) Investments
Investments in which the Company owns less than 20% of a company's stock and does not have the ability to exercise significant influence are accounted for on the cost basis. Such investments are stated at the lower of cost or market value and are included in other non current assets on the balance sheet. The equity method of accounting is used for companies and other investments in which the Company has significant influence; generally this represents common stock ownership of at least 20% but not more than 50%. Under the equity method, the Company's proportionate share of each investee's operating losses and amortization of the investor's net excess investment over its equity in each investee's net assets is included in loss on equity investments within the Statement of Operations. These investments are included in other non current assets on the Balance Sheet. The Company assesses the need to record impairment losses on investments and records such losses when the impairment is determined to be other-than-temporary. These losses are included in other income (expense) in the Statement of Operations.
(j) Accounting for Impairment of Long-Lived and Intangible Assets
Effective January 1, 2002, we adopted SFAS No. 142, "Goodwill and Other Intangible Assets" and SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Asset". SFAS 142 eliminates the amortization of goodwill and indefinite-lived intangible assets, addresses the amortization of intangible assets with finite lives and addresses impairment testing and recognition for goodwill and intangible assets. SFAS No. 144 establishes a single model for the impairment of long-lived assets. We assess goodwill 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 nonamortizable 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.
(k) Intangible Assets
Intangible assets include goodwill, trademarks, 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. In 2001 and 2000, goodwill amortization was recorded using the straight-line method over periods ranging from three to ten years. Effective January 1, 2002, the Company adopted the provisions of Financial Accounting Standards Board (FASB) No. 142 Goodwill & Other Intangible Assets, which ceases goodwill amortization and requires an annual assessment of goodwill for impairment in the absence of an indicator of possible impairment. Trademarks and customer lists are being amortized on a straight-line basis over ten years. Technology is being amortized on a straight-line basis over its estimated useful lives from three to five years. See note 7.
(l) Income Taxes
Income taxes are accounted for under the asset and liability method. Under this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in results of operations in the period that the tax change occurs. Valuation allowances are established, when necessary, to reduce deferred tax assets to the amount expected to be realized.
(m) Revenue Recognition
The Company's business messaging services include message delivery services such as electronic data interchange or "EDI," telex, desktop fax, broadcast and production messaging services; managed e-mail and groupware hosting services; services that help protect corporate e-mail systems such as virus protection, spam control and content filtering services, and professional messaging services and support. The Company derives revenues monthly per-message and usage-based charges for our message delivery services; from monthly per-user or per-message fees for managed e-mail and groupware hosting and virus protection, spam control and content filtering services, and license and consulting fees for our professional services. Revenue from e-mail and groupware hosting services, virus protection, spam control and content filtering services, message delivery services and professional services is recognized as the services are performed.
Facsimile license revenue is recognized over the average estimated customer life of 3 years. The Company also licenses software under noncancellable license agreements. License fee revenues are recognized when a noncancellable license fee is in force, the product has been delivered and accepted, the license fee is fixed, vendor specific objective evidence exists for the undelivered element and collectibility is reasonably assured. Maintenance and support revenues are deferred and recognized ratably over the term of the related agreements. The Company also may host the software if requested by the customer. The customer has the option to decide who hosts the application. If the Company provides the hosting, revenue from hosting is ratably recognized over the hosting periods. Pursuant to Emerging Issues Task Force 00-3, "Application of AICPA Statement of Position 97-2 to Arrangements That Include the Right to Use Software on Another Entity's Hardware", because the customer has the option of hosting the software itself or contracting with an unrelated third party to host the software, the hosting fee is ratably recognized over the hosting period in accordance with the respective accounting guidance.
The Company also enters into supplier arrangements providing bulk messaging services, at a fixed price and minimum quantity to certain customers for a specified period of time. Revenues earned under such arrangements are recognized over the term of the arrangement assuming collection of the resultant receivable is probable.
Prior to the sale of the Advertising Network Business on March 30, 2001 (see Note 4), advertising revenues were derived principally from the sale of banner advertisements. Revenue on banner advertisements was recognized ratably as the advertisements or respective impressions were delivered either on a "cost per thousand" or "cost per action" basis. Revenue on upfront placement fees and promotions was deferred and recognized over the term of the corresponding agreement.
The Company also traded advertisements on its Web properties in exchange for advertisements on the Internet sites of other companies as part of the ad network business. Barter revenues and expenses were recorded at the fair market value of services provided or received; whichever is more determinable in the circumstances. Revenue from barter transactions were recognized as income when advertisements were delivered on the Company's Web properties. Barter expense was recognized when the Company's advertisements are run on other companies' Web sites, which is typically in the same period when barter revenue was recognized. If the advertising impressions were received from the customer prior to the Company delivering the agreed-upon advertising impressions, a liability was recorded, and if the Company delivered the advertising impressions to the other companies' Web sites prior to receiving the agreed-upon advertising impressions, a prepaid expense was recorded. At December 31, 2002, 2001 and 2000, the Company did not record a liability for barter advertising to be delivered. Barter revenues, which are a component of advertising revenue, amounted to $0.6 million and $4.3 million for the years ended December 31, 2001 and 2000, respectively. For the years ended December 31, 2001 and 2000, barter expenses, which is a component of cost of revenues, were approximately the same $0.6 million and $4.3 million, respectively.
The advertising network subscription services were deferred and recognized ratably over the term of the subscription periods of one, two and five years as well as eight years for its lifetime subscriptions. Commencing March 10, 1999, the Company no longer offered lifetime memberships and only offered monthly and annual subscriptions. The eight-year amortization period for lifetime subscriptions was based on the weighted-average expected usage period of a lifetime member. The Company offered 30-day trial periods for certain subscription services. The Company only recognized revenue after the 30-day trial period expires. Deferred revenues principally consist of subscription fees received from members for use of the Company's premium email services. The Company was obligated to provide any enhancements or upgrades it developed and other support in accordance with the terms of the applicable Mail.com Partner agreements. The Company provided an allowance for credit card chargebacks and refunds on its subscription services based upon historical experience. The Company provided pro rated refunds and chargebacks to subscription members who elect to discontinue their service. The actual amount of refunds and chargebacks approximated management's expectations for all periods presented. Deferred revenue represents payments that have been received in advance of the services being performed.
Other revenues includes revenues from the sale of domain names, which are recognized at the time when the ownership of the domain name is transferred provided that no significant Company obligation remains and collection of the resulting receivable is probable. To date, such revenues have not been material.
(n) 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 e-mail products on our partners' and our email web sites.
(o) 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.
The Company has entered into certain partner agreements whereby the Company compensates its partners based upon a percentage of net revenues generated by the Company on its partners' email Web sites. The Company's partner payments are included as a component of sales and marketing expenses in the same period the revenues are recorded.
(p) 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, restricted investments, marketable securities, accounts receivable, notes payable and convertible notes payable. At December 31, 2002 and December 31, 2001, the fair value of cash, cash equivalents, restricted investments, marketable securities and accounts receivable approximated their financial statement carrying amount because of the short-term maturity of these instruments. The recorded values of notes payable and convertible notes payable approximate their fair values, as interest approximates market rates with the exception of the Convertible Subordinated Notes payable with a carrying value of $24.1 million, which has an estimated fair value of $6.0 million at December 31, 2002 based upon quoted market prices.
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 2002 or 2001. Revenues from the Company's five largest customers accounted for an aggregate of 6%, 3% and 8% of the Company's total revenues in 2002, 2001 and 2000, respectively.
(q) Stock-Based Compensation Plans
In 2002, 2001 and 2000, we 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, we have 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. SFAS No. 148 also requires more prominent and more frequent disclosures in both interim and annual financial statements about the method of accounting for stock-based compensation and the effect of the method used on reporting results. We adopted the disclosure provisions of SFAS No. 148 as of December 31, 2002 and continue to apply the measurement provisions of APB 25. Under APB Opinion No. 25, compensation expense is recognized based upon the difference, if any, at the measurement date between the market value of the stock and the option exercise price. The measurement date is the date at which both the number of options and the exercise price for each option are known. The following table illustrates the effect on net loss and net loss per share if we had applied the fair value recognition provisions of SFAS No. 123 to stock-based employee compensation.
The resulting effect on the pro forma net loss disclosed for the years ended December 31, 2002, 2001 and 2000 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 only three, four and five years, respectively, of grants and related vesting, while subsequent years will include additional grants and vesting. For purposes of pro-forma disclosure, the estimated fair value of the options is amortized to expense over the options' vesting period.
The fair value of each option grant is estimated on the date of grant using the Black Scholes method option-pricing model with the following assumptions used for grants made in 2002: dividend yield of zero (0%) percent, average risk-free interest rate of 4.1%, expected life of 5 years and volatility of 136%, 2001: dividend yield of zero (0%) percent, average risk-free interest rate of 4.4%, expected life of 5 years and volatility of 115%, in 2000: dividend yield of zero (0%) percent, average risk-free interest rate of 6.10%, expected life of 5 years and volatility of 107%.
(r) Basic and Diluted Net Loss Per Share
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 since all common stock equivalents are anti-dilutive for each of the periods presented.
Diluted net loss per common share for the years ended December 31, 2002, 2001 and 2000, does not include the effects of employee options to purchase 2,773,446, 1,855,781 and 1,334,429 shares of common stock, respectively, and 1,843,982, 1,843,982 and 22,687 common stock warrants, respectively, as their inclusion would be antidilutive. Similarly, the computation of diluted net loss per share for 2002 excludes the effect of shares issuable upon the conversion of any outstanding Convertible Notes at December 31.
(s) 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.
(t) Recent Accounting Pronouncements
In June 2001, Statement of Financial Accounting Standards No. 143, "Accounting for Asset Retirement Obligations" ("Statement 143") was issued. Statement 143 addresses financial accounting and reporting for legal obligations associated with the retirement of tangible long-lived assets and the associated retirement costs that result from the acquisition, construction, or development and normal operation of a long-lived asset. Upon initial recognition of a liability for an asset retirement obligation, Statement 143 requires an increase in the carrying amount of the related long-lived asset. The asset retirement cost is subsequently allocated to expense using a systematic and rational method over the asset's useful life. Statement 143 is effective for fiscal years beginning after June 15, 2002. The adoption of this statement is not expected to have a material impact on the Company's financial position or results of operations.
In April 2002, Statement of Financial Accounting Standards No. 145, "Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections" ("Statement 145") was issued. FASB Statement No. 4 required all gains and losses from the extinguishment of debt to be reported as extraordinary items and Statement No. 64 related to the same matter. Statement 145 requires gains and losses from certain debt extinguishment to not be reported as extraordinary items when the use of debt extinguishment is part of the risk management strategy. Statement 44 was issued to establish transitional requirements for motor carriers relative to intangible assets. Those transitions are completed, therefore Statement 44 is no longer necessary. Statement 145 also amends Statement No. 13 requiring sale-leaseback accounting for certain lease modifications. Statement 145 is effective for fiscal years beginning after May 15, 2002. The provisions relating to sale-leaseback are effective for transactions after May 15, 2002. The Company adopted Statement 145 effective July 1, 2002. The adoption of this Statement resulted in gains and losses from debt restructuring and extinguishments of debt that were previously recorded as extraordinary being reclassified as operating activities. The following sets forth the impact of the reclassifications on the income (loss) from continuing operations and income (loss) per share from continuing operations:
In July 2002, Statement of Financial Accounting Standards No. 146, "Accounting for Costs Associated with Exit or Disposal Activities" ("Statement 146") was issued. This Statement addresses financial accounting and reporting for costs associated with exit or disposal activities and nullifies Emerging Issues Task Force Issue ("EITF") 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)." The principal difference between Statement 146 and EITF 94-3 relates to the timing of liability recognition. Under Statement 146, a liability for a cost associated with an exit or disposal activity is recognized when the liability is incurred. Under EITF 94-3, a liability for an exit cost was recognized at the date of an entity's commitment to an exit plan. The provisions of Statement 146 are effective for exit or disposal activities that are initiated after December 31, 2002. The adoption of this statement is not expected to have a material impact on the Company's financial position or results of operations.
(u) 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). Net gains and losses from foreign currency transactions are included in the 2002, 2001 and 2000 consolidated statements of operations and were not significant.
(2) Acquisitions
GN Comtext
During July 2001, the Company acquired the assets of GN Comtext ("GN") for $1. Additionally, the Company received a $1.1 million unsecured interest free loan from the former parent company of GN, GN Store Nord A/S and received approximately $175,000 for transition services which were recorded as a reimbursement of costs during the third quarter of 2001 and will collect and retain a percentage of certain accounts receivable collected on behalf of GN. This loan was paid in December 2001. GN offers value-added messaging services to over 3,000 customers ranging from small business to multi-national companies around the world. The excess of fair market value of the assets acquired and the liabilities assumed over the purchase price resulted in negative goodwill of $782,000 which was recognized as an extraordinary gain during the quarter ended September 30, 2001 in accordance with the provisions of FASB Statement No. 141, "Business Combinations.".
Swift Telecommunications, Inc. And Easylink Services
On January 31, 2001, the Company and Swift Telecommunications, Inc. ("STI"), a New York corporation, entered into an Agreement and Plan of Merger ("Merger Agreement"). On February 23, 2001, the Company completed the acquisition of STI. On January 31, 2001, and concurrent with the execution and delivery of the Merger Agreement, STI acquired from AT&T Corp. its EasyLink Services business ("EasyLink Services"). On April 2, 2001, Mail.com changed its name to EasyLink Services Corporation (formerly Mail.com, Inc., the "Company" or "EasyLink").
STI together with its newly acquired EasyLink Services business is a global provider of transaction delivery services such as electronic data interchange, e-mail, fax and telex.
At the closing of the acquisition by STI of the EasyLink Services business from AT&T, the Company advanced $14 million to STI in the form of a loan, the proceeds of which were used to fund part of the $15 million cash portion of the purchase price to AT&T. Upon the closing of the acquisition of STI, the Company assumed a $35 million note issued by STI to AT&T. The $35 million note was secured by the assets of STI, including the EasyLink Services business, and the shares of EasyLink Class A common stock issued to the sole shareholder (who became an officer and director of the Company) in the merger. The AT&T note was payable in equal monthly installments over four years, bearing interest at the rate of 10% per annum for the first six months of the note. Thereafter the rate was to be adjusted every six months equal to 1% plus the prime rate as listed in the Wall Street Journal on such date of adjustment. AT&T subsequently entered into an agreement with the Company to restructure the note. On November 27, 2001, the note was converted into a package of securities consisting of a promissory note in the principal amount of $10 million, 1 million shares of Class A common stock and warrants to purchase 1 million shares of Class A common stock. The $10 million note is secured by the same security interests that secured the $35 million note. The warrants have an exercise price equal to $6.10 per share, subject to adjustment. See Note (8) Notes Payable for a description of the restructuring, the promissory note and the warrants.
Upon the closing of the acquisition of STI, the Company paid to the sole shareholder (who became an officer and director of the Company) of STI $835,000 in cash and issued an unsecured note for $9,188,000 and 1,876,618 shares of EasyLink Class A common stock, valued at $30.8 million, as consideration for the acquisition of STI. The value of the common stock issued to STI is based on the average market price of EasyLink's common stock, as quoted on the Nasdaq national market, for the two days immediately prior to, the day of, and the two days immediately after the announcement of the transaction on February 8, 2001. The $9,188,000 note was payable in four equal semi-annual installments over two years and may be prepaid in whole or in part at any time and from time to time without payment of premium or penalty. The note was non-interest bearing unless the Company fails to make a required payment within 30 days after the due date therefor. Thereafter, the note will bear interest at the rate of 1% per month. The note also contains certain customary covenants and events of default. The holder of the note subsequently entered into an agreement with the Company to restructure the note. On November 27, 2001, the note was converted into a package of securities consisting of a senior convertible note in the principal amount of approximately $2.68 million and has an initial conversion price equal to $10.00 per share, approximately 268,000 shares of Class A common stock and warrants to purchase approximately 268,000 shares of Class A common stock. The warrants have an exercise price equal to the average of the closing prices of the Company's Class A common stock over the 30 trading days ending two days before the closing of the restructuring of $6.10 per share. See Note (8) Notes Payable for a description of the restructuring, the senior convertible note and the warrants.
The cash portion of the merger consideration and the reimbursement of payments made by the sole shareholder of STI were funded out of EasyLink's available cash and from the proceeds received by the Company on January 8, 2001 from the issuance of $10.3 million of 10% Senior Convertible Notes due January 8, 2006.
The Company allocated a portion of the purchase price to the fair market value of the acquired assets and liabilities assumed of STI and the EasyLink Services business. The excess of the purchase price over the fair market value of the acquired assets and liabilities assumed of STI and the EasyLink Services business has been allocated to goodwill ($24 million), assembled workforce ($3 million), technology ($11 million), trademarks ($16 million) and customer lists ($11 million). Goodwill, trademarks and customer lists are being amortized over a period of 10 years, the expected estimated period of benefit, and assembled workforce and technology are being amortized over 5 years, the estimated period of benefit. The purchase price that was allocated was based upon the final outcome of the valuation and appraisals of the fair value of the acquired assets and assumed liabilities at the date of acquisition, as well as the identification and valuation of certain intangible assets such as customer lists, in-place workforce, technology and trademarks, etc. The fair value of the technology, assembled workforce, trademarks, customer lists and goodwill was determined by management using the excess earnings method, a risk-adjusted cost approach and the residual method, respectively. Amortization expense for the year ended December 31, 2001 was approximately $7 million.
Additionally, upon the closing of the STI acquisition, the President and sole shareholder of STI entered into an employment agreement with the Company and became President of International Operations as well as a member of the Company's Board of Directors.
The consideration paid by EasyLink was determined as a result of negotiations between EasyLink and STI.
During January 2001, STI purchased the real time fax business from Xpedite Systems, Inc. located in Singapore and Malaysia (these two subsidiaries conduct business under the name "Xtreme") for approximately $500,000 in cash.
In connection with the acquisition of STI, the Company entered into a conditional commitment to acquire Telecom International, Inc. ("TII"), which immediately prior to the acquisition of STI was an affiliate of the sole shareholder of STI. The purchase price for TII was originally negotiated at $117,646 in cash, a promissory note in the aggregate principal amount of approximately $1,294,000 and 267,059 shares of the Company's Class A common stock. In order to facilitate the Company's proposed debt restructuring and to reduce the Company's debt obligations and cash commitments, the former sole shareholder of STI and the Company agreed to modify the Company's commitments in respect of TII. In lieu of acquiring TII, the Company purchased certain assets owned by TII and assumed certain liabilities. As consideration, the Company issued 300,000 shares of Class A common stock valued at $1.9 million as the sole purchase price. As a result of this transaction, the Company recorded loss on the extinguishment of this commitment of $2.4 million.
As part of the transaction with STI, we also entered into a conditional commitment to acquire the 25% minority interests in two STI subsidiaries for $47,059 in cash, promissory notes in the aggregate principal amount of approximately $517,647 and 106,826 shares of Class A Common Stock. This transaction is subject to certain conditions, including satisfactory completion of due diligence, receipt of regulatory approvals and other customary conditions.
The following unaudited pro-forma consolidated amounts give effect to the 2001 acquisitions as if they had occurred on January 1, 2001, by consolidating their results of operations with the results of the Company for the years ended December 31, 2001. The unaudited pro-forma consolidated results are not necessarily indicative of the operating results that would have been achieved had the transactions been in effect as of the beginning of the periods presented and should not be construed as being representative of future operating results. The pro forma basic and diluted net loss per common share is computed by dividing the net loss attributable to common stockholders by the weighted-average number of common shares outstanding. Diluted net loss per share equals basic net loss per share, as common stock equivalents are anti-dilutive for all pro forma periods presented.
December 31, - ------------------------------------------------------------------------------- (In thousands, except per share amounts) 2001 ------------
Revenues..................................................... $ 150,465 Loss from continuing operations.............................. $ (148,198) Loss from discontinued operations............................ $ (63,027) Extraordinary gain........................................... $ 782 Net loss attributable to common stockholders................. $ (210,443) Basic and diluted net loss per common share: Loss from continuing operations.............................. $ (15.23) Loss from discontinued operations............................ (6.47) Extraordinary gain........................................... 0.08 Net loss..................................................... $ (21.62) Weighted average shares used in net loss per common share calculation (1)............................. 9,734
(1) The Company computes net loss per share in accordance with provisions of SFAS No. 128, "Earnings per Share." Basic net loss per share is computed by dividing the net loss for the period by the weighted-average number of common shares outstanding during the period. The calculation of the weighted average number of shares outstanding assumes that 2,601,628 shares of EasyLink's common stock issued in connection with its acquisitions were outstanding for the entire period or date of inception, if later. The weighted average common shares used to compute pro forma basic net loss per share includes the actual weighted average common shares outstanding for the periods presented, respectively, plus the common shares issued in connection with the 2001 acquisitions from January 1, 2001 or date of inception if later. Diluted net loss per share is equal to basic net loss per share as common stock issuable upon exercise of the Company's employee stock options and upon exercise of outstanding warrants are not included because they are antidilutive. In future periods, the weighted-average shares used to compute diluted earnings per share will include the incremental shares of common stock relating to outstanding options and warrants to the extent such incremental shares are dilutive.
(3) Other Acquisition Related Events
Allegro
The Company acquired The Allegro Group, Inc. ("Allegro"), for approximately $20.4 million including acquisition costs pursuant to the terms of an Agreement and Plan of Merger dated August 20, 1999 (the "Merger Agreement"), among EasyLink, AG Acquisition Corp., a wholly-owned subsidiary of the Company ("Acquisition Corp."), Allegro and the shareholders of Allegro. Pursuant to the terms of the Merger Agreement, Allegro merged with and into Acquisition Corp. and became a wholly owned subsidiary of the Company. The acquisition was accounted for as a purchase business combination. The consideration payable in connection with the acquisition of Allegro consisted of the following: approximately $3.2 million in cash and 110,297 shares of Class A common stock valued at approximately $17.1 million. The Company also incurred acquisition costs of approximately $150,000. In addition, one-time signing bonuses of $800,000, which is included in the operating expenses in the statement of operations, were paid to employees of Allegro who were not shareholders of Allegro, pursuant to employment agreements entered into with them upon the closing date. In connection with their employment agreements with the Company, EasyLink also granted options to Allegro employees to purchase approximately 62,500 shares of Class A common stock at an exercise price of $160.00 per share, the then fair value. These options vest quarterly over four years subject to continued employment.
The Company was obligated to pay additional consideration (the "Contingent Consideration") upon completion of its audited financial statements for the year ended December 31, 2000 based on the achievement of certain performance standards for such year. The Contingent Consideration was up to $3.2 million payable in cash, additional bonus payments up to $800,000, and up to $16.0 million payable in shares of Class A common stock based on the market value of such stock at the time of payment (but such market value shall be deemed to be not less than $80.00 per share). On November 2, 2000, the Company settled its contingent consideration obligation with Allegro. The Company paid to the former shareholders of Allegro 28,319 shares of Class A common stock valued at $139,000 on December 31, 2001 pursuant to this settlement. At the time the consideration became issuable, the Company adjusted the purchase price and recorded additional goodwill.
The consideration payable was determined as a result of negotiations between the Company and Allegro. The number of shares of Class A common stock issued to Allegro shareholders, was determined based on the exchange rate of 277.05561 shares of Class A common stock for each share of Allegro common stock. Funds paid in connection with the acquisition of Allegro were provided from cash on hand.
The Company has allocated a portion of the purchase price to the net book value of the acquired assets and assumed liabilities of Allegro as of the date of acquisition. The excess of the purchase price over the net book value of the acquired assets and liabilities of Allegro of $20.1 million has been allocated to goodwill ($19.4 million) and other intangible assets of approximately $700,000, consisting of employee workforce, trade names and contracts. Goodwill and other intangible assets will be amortized over a period of three years, the expected period of benefit.
The Company's 1999 consolidated statement of operations reflects a write-off of the amount of the purchase price allocated to acquired in-process technology of $900,000. The valuation of the write-off of acquired in-process technology was based on management's determination that the new versions of MailZone technology acquired from Allegro had not been developed into the platform required by the Company at the date of acquisition.
TCOM
On October 18, 1999, the Company acquired TCOM, Inc. ("TCOM"), a software technology development firm, specializing in the design of carrier class applications for the telecommunications and computer telephony industries. The Company was not continuing the business operations of TCOM but made the acquisition in order to obtain technology and development resources. The acquisition had been accounted for an acquisition of assets. The Company paid $2 million in cash and issued 43,983 shares of Class A common stock valued at approximately $6.1 million. In addition, the Company paid to the former employees of TCOM bonuses totaling $400,000, payable in six-month installments after the closing date in the amounts of $74,000, $88,000, $116,000 and $122,000, provided such employees continue their employment through the applicable payment dates. As of December 31, 2001, the amount was fully repaid. The excess of the purchase price over the net book value of the assets acquired and assumed liabilities of TCOM of approximately $8.1 million has been allocated to other intangible assets (workforce). Such amounts will be ratably amortized over a period of three years, the expected period of benefit.
The Company was obligated to pay additional consideration to the sellers of TCOM based upon the achievement of certain objectives over an 18-month period. The additional consideration was to consist of up to $1.0 million payable in cash and up to $2.75 million payable in shares of Class A common stock based on its market value of such stock at the time of payment, although the market value would be deemed to be not less than $40.00 per share. On November 1, 2000, the Company settled its contingent consideration obligation with TCOM. The Company agreed to pay the former shareholders of TCOM a total of $3.75 million, comprised of a cash payment of $1 million and $2.75 million in Class A common stock, on April 18, 2001, determined based on the market price at that time, but not less than $40.00 per share. The Company adjusted the purchase price for the $1 million payment and is amortizing such costs over the remaining life of the other intangible assets, namely workforce.
During the first quarter of 2001, management determined that a portion of the carrying value of the other intangible assets associated with TCOM had become impaired due to the restructuring of the workforce that had generated those intangible assets upon acquisition in October 1999. As a result, an impairment charge of $4.3 million was recorded as part of the restructuring charge.
During the second quarter of 2001, the Company settled its remaining obligations relating to the contingent obligations owed to the former owners of TCOM by issuing 162,083 shares of its Class A common stock valued at approximately $1.3 million and paying cash of $300,000. The Company determined that the value of the other intangible assets, primarily workforce, had become further impaired due to the resignation of the remaining workforce, and accordingly recorded an additional impairment charge of approximately $1.3 million during the second quarter of 2001 as part of the restructuring charge. After giving effect to this write-off, the net goodwill balance was reduced to $0.
NetMoves Impairment Charge
EasyLink continually evaluates the carrying value of its long-lived assets. If it is determined that the carrying value may require adjustment and the estimated fair value of the asset is less than its recorded amount, an impairment charge is recorded. During the fourth quarter of 2001, the Company determined that the carrying values of certain of its long-lived assets required adjustment. The long-lived asset impairment charges of $60 million recorded in the fourth quarter related to goodwill associated with the Company's fiscal 2000 acquisition of NetMoves Corporation ("NetMoves") and reduced the goodwill net book value to $17 million. NetMoves had experienced declines in operating and financial metrics over the previous several quarters in comparison to the metrics forecasted at the time of its respective acquisition. The amount of the impairment charge was determined by comparing the carrying value of goodwill to fair value at December 31, 2001, in accordance with the Company's formal impairment policy which is further described in Note 1.
Messaging Acquisitions
During the third quarter of 2000, the Company acquired two companies by issuing 71,020 shares of Class A common stock valued at approximately $4.3 million based upon the Company's average trading price at the date of acquisition. The excess of the purchase price over the fair market value of the assets acquired and liabilities assumed has been allocated to goodwill and is being amortized over a period of three years, the expected period of benefit. These acquisitions were accounted for as a purchase business combination. During the second quarter of 2001, approximately $826,000 of goodwill was written off as management determined that the carrying value of the goodwill associated with one of these acquisitions had become permanently impaired. After giving effect to the write-off, the net goodwill balance attributable to that acquisition was reduced to $0.
(4) Sale of Businesses
On September 20, 2002, the Company sold its customer contracts related to its email hosting service ("NIMS") line to Call Sciences, Inc. Call Sciences paid $300,000 in cash upon closing. The consideration paid to EasyLink was determined as a result of negotiations between Call Sciences, Inc. and EasyLink. In connection with the sale, the parties entered into a transition services agreement whereby the Company would receive payments for services rendered during the 2 month period following the close. As a result of the sale, the Company transferred the customer contracts and recorded a gain on the sale of NIMS of $300,000. In October 2002, the Company sold for $126,000 a software and consulting business in England that was previously acquired in the GN Context acquisition. The full purchase price was recorded as a gain as the net book value of assets transferred was zero.
On March 30, 2001, the Company sold its advertising network to Net2Phone, Inc. Net2Phone paid the Company $3 million in cash upon the closing. The Company received an additional $500,000 in April 2001 based upon the achievement of certain milestones by the Company. The consideration paid to EasyLink was determined as a result of negotiations between Net2Phone, Inc. and EasyLink. In connection with the sale, the parties entered into a hosting agreement whereby the Company would receive payments for hosting the consumer mailboxes for a minimum of one year. As a result of the sale, the Company transferred net assets, including certain domain names and partner agreements (see Note 10), and liabilities related to the advertising network to Net2Phone, and recorded a loss on the sale of the advertising network of $1.8 million during the fourth quarter of 2001.
During the second quarter of 2001, the Company completed the migration of the hosting of these consumer mailboxes to a third party provider who is paid for this service. The hosting agreement was terminated as of September 30, 2001.
(5) Balance Sheet Components
Property and equipment, including equipment under capital leases, are stated at cost and are summarized as follows, in thousands:
Domain assets held for sale consist of the following, in thousands:
Accrued expenses consist of the following, in thousands:
(6) Investments
The Company assesses the need to record impairment losses on investments and records such losses when the impairment of an investment is determined to be other-than-temporary.
On July 25, 2000, EasyLink entered into a strategic relationship with BulletN.net, Inc. The investment has been accounted for under the cost method of accounting, as EasyLink owns less than 20% of the outstanding stock of BulletN.net. As part of this agreement BulletN.net issued 666,667 shares of its common stock and a warrant to purchase up to 666,667 shares of BulletN.net common stock at $3.75 per share to EasyLink in exchange for 36,443 shares of EasyLink Class A common stock valued at approximately $3.1 million. The Company concluded that the carrying value of this cost-based investment was permanently impaired based on the achievement of business plan objectives and milestones and the fair value of the investment relative to its carrying value. During 2002 and 2001, the Company recorded impairment charges of $0.5 million and $2.6 million, respectively, due to other-than-temporary declines in the value of this investment. Such amounts are included in impairment of investments within other income (expense) in the 2002 and 2001 statement of operations. On March 1, 2001, in consideration of the exchange and cancellation of the 666,667 warrants and the waiver of certain anti-dilution rights, the Company received a new warrant to purchase 266,667 shares of BulletN.net common stock at $1 per share.
During 1999, the Company acquired an equity interest in 3Cube, Inc. ("3Cube"), which was accounted for under the cost method. Under the agreement, the Company paid $1.0 million in cash and issued 8,008 of its Class A common stock, valued at approximately $2.0 million, in exchange for 307,444 shares of 3Cube convertible preferred stock which represents an equity interest of less than 20% of 3Cube. On June 30, 2000, the Company made an additional investment in 3Cube, Inc. by issuing 25,505 shares of Class A common stock valued at approximately $1.5 million in exchange for 50,411 shares of 3Cube Series C Preferred Stock. At December 31, 2000, EasyLink owned preferred stock of 3Cube, representing an ownership interest of 21% of the combined common and preferred stock outstanding of 3Cube, Inc. Accordingly, the Company now accounts for this investment under the equity method of accounting. The change from the cost method to the equity method of accounting resulted in a decrease of the carrying value of the investment by $2.1 million in 2000. In addition, as a result of sequential declines in operating results of 3Cube, management made an assessment of the carrying value of its equity investment and determined that it was in excess of its estimated fair value. Accordingly, in December 2000, EasyLink wrote down the value of its investment in 3Cube by $200,000 as it determined that the decline in its value was other-than-temporary. During the first quarter of 2001, the Company further reduced its investment in 3Cube by $59,000 to $2 million, representing the value the Company received in August 2001 upon the liquidation of its investment.
On April 17, 2000, in exchange for $500,000 in cash, the Company acquired certain source code technologies, trademarks and related contracts relating to the InTandem collaboration product ("InTandem") from IntraACTIVE, Inc., a Delaware corporation (now named Bantu, Inc., "Bantu"). On the same date, the Company also paid Bantu an upfront fee of $500,000 for further development and support of the InTandem product. On the same date, pursuant to a Common Stock Purchase Agreement, the Company acquired shares of common stock of Bantu representing approximately 4.6% of Bantu's outstanding capital stock in exchange for $1 million in cash and 46,296 shares of its Class A common stock, valued at approximately $3.6 million. Pursuant to the Common Stock Purchase Agreement, the Company also agreed to invest up to an additional $8 million in the form of shares of its Class A Common stock in Bantu in three separate increments of $4 million, $2 million and $2 million, respectively, based upon the achievement of certain milestones in exchange for additional shares of Bantu common stock representing 3.7%, 1.85% and 1.85%, respectively, of the outstanding common stock of Bantu as of April 17, 2000. The number of shares of the Company's Class A common stock issuable at each closing will be based on the greater of $90 per share and the average of the closing prices of the Company's Class A common stock over the five trading days prior to such closing date. In July 2000, the Company issued an additional 9,259 shares of its Class A common stock valued at approximately $590,000 to Bantu in accordance with a true-up provision in the Common Stock Purchase Agreement. In September 2000, the Company issued an additional 44,444 shares of its Class A common stock valued at approximately $2.9 million as payment for the achievement of a milestone indicated above. In January 2001, the Company issued an additional 22,222 shares of its Class A common stock valued at approximately $285,000 as payment for the achieved milestone indicated above. The Company accounts for this investment under the cost method. During 2002 and 2001, management made assessments of the carrying value of its investment, based upon incremental investments made by third parties, and determined that the carrying value of this cost-based investment was permanently impaired as it was in excess of its estimated fair value. Accordingly, EasyLink wrote down the value of its investment in Bantu by $1.0 million and $7.3 million in 2002 and 2001, respectively, as it determined that the decline in its value was other-than-temporary.
On June 30, 2000, the Company received 35,714 shares of common stock of Onview.com valued at $125,000 as payment for the Company's advertising services. During the second quarter of 2001, the Company determined that the value of this investment had become permanently impaired and recorded an impairment charge of $125,000.
On July 25, 2000, the Company issued 10,222 shares of its Class A common stock valued at approximately $872,000 as an investment in Madison Avenue Technology Group, Inc. (CheetahMail). The investment has been accounted for under the cost method of accounting as the Company owns less than 20% of the outstanding stock of CheetahMail. In consideration thereof, the Company received 750,000 shares of Series B convertible preferred stock and a warrant to purchase 75,000 shares of common stock of CheetahMail. The Company transferred these shares of preferred stock and warrants to Net2Phone pursuant to the sale of the Company's Advertising Network.
As of December 31, 2001, all of the Company's investments were written down to minimal amounts due to other than temporary declines in the value of its investments.
(7) Goodwill and Intangible Assets
In June 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 141, "Business Combinations" ("Statement 141"), and Statement No. 142, "Goodwill and Other Intangible Assets" ("Statement 142"). Statement 141 requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001. Statement 141 also specifies criteria intangible assets acquired in a purchase method business combination must meet to be recognized and reported apart from goodwill, noting that any purchase price allocable to an assembled workforce may not be accounted for separately. Statement 142 requires that goodwill and intangible assets with indefinite useful lives no longer be amortized, but instead tested for impairment at least annually in accordance with the provisions of Statement 142. Statement 142 also requires that intangible assets with definite useful lives be amortized over their respective estimated useful lives to their estimated residual values, and reviewed for impairment in accordance with Financial Accounting Standards Board No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of" ("Statement 121").
The Company adopted the provisions of Statement 141 immediately and Statement 142 effective January 1, 2002. Furthermore, any goodwill and any intangible asset determined to have an indefinite useful life that are acquired in a purchase business combination completed after June 30, 2001 will not be amortized, but will continue to be evaluated for impairment in accordance with the appropriate pre-Statement 142 accounting literature. Goodwill and intangible assets acquired in business combinations completed before July 1, 2001 were amortized prior to the adoption of Statement 142.
Statement 141 requires, upon adoption of Statement 142, that the Company evaluate its existing intangible assets and goodwill that were acquired in a prior purchase business combination, and to make any necessary reclassifications in order to conform with the new criteria in Statement 141 for recognition apart from goodwill. Upon adoption of Statement 142, the Company is required to reassess the useful lives and residual values of all intangible assets acquired in purchase business combinations, and make any necessary amortization period adjustments by the end of the first interim period after adoption. In addition, to the extent an intangible asset is identified as having an indefinite useful life, the Company is required to test the intangible asset for impairment in accordance with the provisions of Statement 142 within the first interim period. Any impairment loss will be measured as of the date of adoption and recognized as the cumulative effect of a change in accounting principle in the first interim period.
In connection with the transitional goodwill impairment evaluation, Statement 142 requires the Company to perform an assessment of whether there is an indication that goodwill is impaired as of the date of adoption. To accomplish this the Company must identify its reporting units and determine the carrying value of each reporting unit by assigning the assets and liabilities, including the existing goodwill and intangible assets, to those reporting units as of the date of adoption. The Company has up to six months from the date of adoption to determine the fair value of each reporting unit and compare it to the reporting unit's carrying amount. To the extent a reporting unit's carrying amount exceeds its fair value, an indication exists that the reporting unit's goodwill may be impaired and the Company must perform the second step of the transitional impairment test. In the second step, the Company must compare the implied fair value of the reporting unit's goodwill, determined by allocating the reporting unit's fair value to all of it assets (recognized and unrecognized) and liabilities in a manner similar to a purchase price allocation in accordance with Statement 141, to its carrying amount, both of which will be measured as of the date of adoption. This second step is required to be completed as soon as possible, but no later than the end of the year of adoption. Any transitional impairment loss will be recognized as the cumulative effect of a change in accounting principle in the Company's statement of earnings.
As of January 1, 2002, the date of adoption, the Company had unamortized goodwill in the amount of $68.8 million, which is subject to the transition provisions of Statement 142. Amortization expense related to goodwill of continuing operations was $40.4 million and $38.8 million for the years ended December 31, 2001 and 2000. During the quarter ended June 30,2002, the Company completed its assessment with the assistance of an independent appraiser in accordance with Statement 142 and determined that there was no impairment as of January 1, 2002. During the quarter ended December 31, 2002, the Company completed a new assessment with the assistance of an independent appraiser in accordance with Statement 142 and determined that there was an impairment. Accordingly, a fair value analysis was performed on the Company's goodwill, intangible assets and other long lived assets which resulted in an aggregate impairment charge of $78.8 million, broken down as follows: $7.5 tradename, $7.6 customer base, $1.1 technology, and $62.6 goodwill.
The current economic and market conditions have lead to forecasts with lower growth rates and a significantly lower market cap of the Company. The methodology used to determine the business enterprise of the Company was the income approach, a discounted cash flow valuation method. The discount rate was determined by using a weighted average cost of capital analysis which was developed using a capital structure which reflects the representative historical mix of debt and equity of a group of guideline companies in this business. Assumptions for normal working capital levels and taxes were also incorporated in the analysis. The value of the trade name and developed technology was based on the relief-from-royalty method. This determines the value by quantifying the cost savings a company enjoys by owning, as opposed to licensing, the intangible asset. The value of the Company's customer base was also determined through an income approach.
The following unaudited pro forma disclosure presents the adoption of Statement 142 as if it had occurred at the beginning of all periods presented:
In connection with the adoption of Statement 142 on January 1, 2002, the Company reclassified $3.6 million in net book value associated with assembled workforce to goodwill. In addition, during the first quarter of 2002, goodwill was reduced by $0.3 million as a result of a final reconciliation related to the STI acquisition (See Note 2).
Although SFAS No. 142 requires disclosure of these amounts to reflect the impact of adoption on the Company's results for the years ending December 31, 2001 and 2000, had goodwill not been amortized and been added back, the effect would have resulted in additional impairment charges being recorded in each of the respective years.
Included in the Company's balance sheet as of December 31, 2002 and 2001 are the following (in thousands):
As of December 31, 2002
As of December 31, 2001
Goodwill and Other Intangible Asset amounts at December 31, 2001 have been reclassified to conform to the December 31, 2002 classifications in accordance with the provisions of SFAS No. 142.
The Company's estimated amortization expense is $3.1 million, $2.6 million, $2.2 million, $0.5 million and $0.2 million in 2003, 2004, 2005, 2006 and 2007, 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. Trademarks and customer lists are being amortized on a straight-line basis over ten years. Technology and software development and licenses are being amortized on a straight-line basis over their estimated useful lives from two to five years.
(8) Notes Payable
7% Convertible Subordinated Notes
On January 26, 2000, the Company issued $100 million of 7% Convertible Subordinated Notes ("the Notes"). Interest on the Notes is payable on February 1 and August 1 of each year, beginning on August 1, 2000. The Notes are convertible by holders into shares of EasyLink Class A common stock at a conversion price of $189.50 per share (subject to adjustment in certain events) beginning 90 days following the issuance of the Notes.
The notes will mature on February 1, 2005. Prior to February 5, 2003 the Notes may be redeemed at the Company's option ("the Provisional Redemption"), in whole or in part, at any time or from time to time, at certain redemption prices, plus accrued and unpaid interest to the date of redemption if the closing price of the Class A common stock shall have equaled or exceeded specified percentages of the conversion price then in effect for at least 20 out of 30 consecutive days on which the NASDAQ national market is open for the transaction of business prior to the date of mailing the notice of Provisional Redemption. Upon any Provisional Redemption, the Company will be obligated to make an additional payment in an amount equal to the present value of the aggregate value of the interest payments that would thereafter have been payable on the notes from the Provisional Redemption Date to, but not including, February 5, 2003. The present value will be calculated using the bond equivalent yield on U.S. Treasury notes or bills having a term nearest the length to that of the additional period as of the day immediately preceding the date on which a notice of Provisional Redemption is mailed.
On or after February 5, 2003, the Notes may be redeemed at the Company's option, in whole or in part, in cash at the specified redemption prices, plus accrued interest to the date of redemption.
In connection with the issuance of these Notes, the Company incurred approximately $3.8 million of debt issuance costs. Such costs have been capitalized and are being amortized ratably over the original term of the Notes. As a result of the exchange note agreements entered into in 2001 and discussed below, the Company recorded a charge of $2.2 million to reduce debt issuance costs relating to that portion of the notes that were exchanged. This charge has been netted against the gain on debt restructuring and settlements included in the 2001 statement of operations.
Senior Convertible Notes issued in Exchange for 7% Convertible Subordinated Notes
On February 1, 2001, the Company entered into a note exchange agreement (the "Note Exchange Agreement"). Under the terms of the agreement, EasyLink issued $11,694,000 principal amount of a new series of 10% Senior Convertible Notes due January 8, 2006 in exchange for the cancellation of $38,980,000 principal amount of its 7% Convertible Subordinated Notes due February 1, 2005.
On February 8, 2001, the Company entered into an additional note exchange agreement. Under the terms of the agreement, EasyLink issued $4,665,000 principal amount of a new series of 10% Senior Convertible Notes due January 8, 2006 in exchange for the cancellation of $15,550,000 principal amount of its 7% Convertible Subordinated Notes due February 1, 2005.
On February 14, 2001, the Company entered into an additional note exchange agreement. Under the terms of the agreement, EasyLink issued $7,481,250 principal amount of a new series of 10% Senior Convertible Notes due January 8, 2006 in exchange for the cancellation of $21,375,000 principal amount of its 7% Convertible Subordinated Notes due February 1, 2005 (the "Subordinated Notes"). Pursuant to this note exchange agreement, on or about May 23, 2001, $2,531,250 in principal amount of these Senior Convertible Notes were exchanged for 142,071 shares of Class A common stock (the "Exchange Shares") leaving $4,950,000 in principal amount of this series of Senior Convertible Notes outstanding.
The Senior Convertible Notes issuable under the February 1, February 8 and February 14 note exchange agreements (the "Exchange Notes") are unsecured, joint and several obligations of EasyLink and its subsidiary EasyLink Services USA, Inc (collectively, the "Companies").
The Exchange Notes bear interest semi-annually at the rate of 10% per annum. One half of each interest payment is payable in cash and one half is payable in shares of EasyLink Class A common stock, par value $.01 per share ("Class A common stock"), until 18 months after the closing date of the financing. Thereafter, one half of each interest payment may be paid in shares of Class A common stock at the option of the Companies. For purposes of determining the number of shares issuable upon payment of interest in shares of Class A common stock, such shares will be deemed to have a value equal to the applicable conversion price at the time of payment.
$11,694,000 of the Exchange Notes is convertible at any time at the option of the holder into Class A common stock at an initial conversion price equal to $13.00 per share. The conversion price is subject to anti-dilution adjustments.
$4,665,000 of the Exchange Notes is convertible at any time at the option of the holder into Class A common stock at an initial conversion price equal to $17.50 per share. The conversion price is subject to anti-dilution adjustments.
$7,481,250 of the Exchange Notes is convertible at any time at the option of the holder into Class A common stock at an initial conversion price equal to $15.00 per share. Also, $2,531,250 of the Exchange Notes was cancelled in exchange for the issuance of Exchange Shares as described above. The conversion price is subject to anti-dilution adjustments.
The Companies may, at their option, prepay the Exchange Notes, in whole or in part, at any time (i) on or after the third anniversary of the closing date of the financing, (ii) if the closing price of the Class A common stock on the NASDAQ stock market, or other securities market on which the Class A common stock is then traded, is at or above $5.00 per share (such amount to be appropriately adjusted in the event of a stock split, stock dividend, stock combination or recapitalization or similar event having a similar effect) for 30 consecutive trading days or (iii) EasyLink desires to effect a merger, consolidation or sale of all or substantially all of its assets in a manner that is prohibited by the Note Purchase Agreement between EasyLink and the initial purchasers of the Exchange Notes (the "Note Purchase Agreement") and the holders of the Exchange Notes fail to consent to a waiver of such prohibition to permit such merger, consolidation or sale.
All of the above exchange transactions (other than the exchange of $2,531,250 of the Senior Convertible Notes described above, which closed on or about May 23, 2001) under the Exchange Note Agreements closed on March 28, 2001.
The above exchange transactions have been accounted for in accordance with Financial Accounting Standards Board Statement No. 15 ("FASB No.15"), "Accounting by Debtors and Creditors for Troubled Debt Restructurings." As a result of these exchanges, the Company recorded a $40.4 million gain on debt restructuring and settlements during the first quarter of 2001.
Because the total future cash payments specified by the new terms of the Exchange Notes, including both payments designated as interest and those designated as face amount, are less than the carrying amount of the Notes, the Company was required to reduce the carrying amount of the Notes, to an amount equal to the total future cash payments specified by the new terms and recognized a gain on exchange of payables equal to the amount of the reduction, less the applicable deferred financing costs associated with the original $100 million 7% Convertible Subordinated Notes of $2.2 million and new financing costs of $40,000.
In future periods, all payments under the terms of the Exchange Notes shall be accounted for as reductions of the carrying amount of the Exchange Notes, and no interest expense shall be recognized on the Exchange Notes for any period between the exchange dates and maturity dates of the Exchange Notes.
Other Senior Convertible Notes
On January 8, 2001, the Company issued $10 million (subsequently increased to $10.26 million) of 10% Senior Convertible Notes due January 8, 2006 to an investor group. On March 19, 2001, the Company completed the issuance of $3.9 million principal amount of 10% Senior Convertible Notes due January 8, 2006 (together with the notes issued pursuant to the January 8, 2001 agreement, (the "Notes") to certain private investors. The Notes are unsecured, joint and several obligations of EasyLink and its subsidiary EasyLink Services USA, Inc. (collectively, the "Companies").
The Notes bear interest, payable semi-annually, at the rate of 10% per annum. One half of each interest payment is payable in cash and one half is payable in shares of EasyLink Class A common stock ("Class A common stock"), until 18 months after the closing date of the financing. Thereafter, one half of each interest payment may be paid in shares of Class A common stock at the option of the Companies. For purposes of determining the number of shares issuable upon payment of interest in shares of Class A common stock, such shares will be deemed to have a value equal to the applicable conversion price at the time of payment.
The Companies may, at their option, prepay the Notes, in whole or in part, at any time (i) on or after the third anniversary of the closing date of the financing, (ii) if the closing price of the Class A common stock on the NASDAQ stock market, or other securities market on which the Class A common stock is then traded, is at or above $5.00 per share (such amount to be appropriately adjusted in the event of a stock split, stock dividend, stock combination or recapitalization or similar event having a similar effect) for 30 consecutive trading days or (iii) EasyLink desires to effect a merger, consolidation or sale of all or substantially all of its assets in a manner that is prohibited by the Note Purchase Agreement dated as of March 13, 2001 between EasyLink and the initial purchasers of the Notes and the holders of the Notes fail to consent to a waiver of such prohibition to permit such merger, consolidation or sale.
Each of the Notes is convertible at any time at the option of the holder into Class A common stock at an initial conversion price equal to $10.00 per share. The conversion price is subject to anti-dilution adjustments.
The $10.26 million principal amount of Notes issued pursuant to the January 8, 2001 agreement are secured by a pledge of the Company's and its wholly-owned subsidiary WORLD.com, Inc.'s share interest in its majority owned subsidiary India.com, Inc. The security interest will be released, among other circumstances, (i) upon repayment of the Notes and accrued interest thereon, (ii) upon a sale, transfer or other disposition of the shares as permitted under the Note Purchase Agreement and the prepayment of Notes as become subject to prepayment in accordance with the Note Purchase Agreement, or (iii) if EasyLink raises at least $35 million in cash proceeds from the sale of assets (including the pledged shares) or from the issuance of certain additional debt or equity financings on or before April 30, 2001.
The net proceeds of the issuance of the $10.26 million principal amount of Notes issued pursuant to the January 8, 2001 agreement were used to fund a portion of the purchase price payable by Swift Telecommunications, Inc. for the acquisition of the AT&T EasyLink Services business and for working capital and other general corporate purposes.
In connection with the issuance of the Notes, the Company granted to the investor group the right to designate one director to the Board of Directors for so long as the investor group and certain other parties associated with it own a specified number of shares of Class A common stock on a fully diluted basis (the "Designation Agreement"). Pursuant to the Designation Agreement, the Board of Directors appointed a director to the Board of EasyLink effective upon the closing of the financing.
During the second quarter of 2001, the Company issued an aggregate of $550,000, 10% Senior Convertible Notes Due January 8, 2006 to certain vendors in exchange for settlement of its obligations to those vendors. Terms of the notes are similar to those notes that were issued on January 8, 2001.
Notes issued in STI/EasyLink Acquisition
In connection with the acquisition of STI, the Company assumed a $35 million note from STI and issued a $9.2 million unsecured note to the former shareholder of STI as partial payment (see Note 2 for additional information).
Zones, Inc. Promissory Note
On July 13, 2001, EasyLink entered into an agreement with Zones, Inc. (formerly Multiple Zones, Inc.) regarding payment of a $1 million promissory note. Pursuant to the agreement, EasyLink paid Zones $200,000 in cash on July 16, 2001. Additionally, Zones agreed to convert $400,000 of the original promissory note into a number of shares of EasyLink Class A common stock based upon the average sales price of the Class A Common Stock over the ten (10) trading days immediately preceding the earlier of (a) the filing of a registration statement for the resale of the shares, and (b) the date on which EasyLink enables Multiple Zones to resell the shares or receive the economic benefit of such resale, but in any event not more than 125,000 shares. EasyLink also undertook to file an S-3 registration statement with the United States Securities and Exchange Commission ("SEC"), or such other registration statement as necessary to register the Settlement Shares with the SEC to permit public resale of those shares by Multiple Zones as soon as practicable after execution of the Settlement Agreement, but in no event later than September 30, 2001. EasyLink also agreed to pay to Multiple Zones an additional $430,000 upon the earlier of (i) the closing of the sale of Multiple Zones Mauritius, Ltd. or Multiple Zones Pvt., Ltd. or their respective successors; or (ii) October 31, 2001.
Under an Amended and Restated Settlement Agreement and Release between the Company and Zones, Inc. dated October 8, 2001, the Company and Zones amended their original July 13, 2001 settlement agreement. Under the October 8, 2001 agreement, the Company paid Zones the remaining $430,000 cash payment owed to Zones, and the parties also fixed the number of shares of Class A common stock issuable by the Company to Zones at 103,359. The shares were issued in 2001.
GN Store Nord A/S
During July 2001, the Company received a $1.1 million loan from the parent of GN Comtext, GN Store Nord A/S, in connection with assets acquired. During the quarter ended September 30, 2001, receivables due from GN Comtext of approximately $200,000 were netted against the principal amounts due to them. The loan was paid December 2001.
Restructuring and Settlements of Certain Debt and Lease Obligations
During the third quarter of 2001, pending the completion of the subsequent restructuring, the Company issued $16.3 million of interim notes, bearing interest at a rate of 12% per annum, in exchange for present and future lease obligations in the amount of $15.1 million. These notes were cancelled upon completion of the fourth quarter debt restructuring. This interim transaction resulted in a loss of $1.1 million in accordance with FASB No. 15.
On November 27, 2001, the Company completed the restructuring of approximately $63 million of debt and lease obligations and a related financing in the amount of approximately $10 million.
Under the terms of the debt restructuring, the Company exchanged an aggregate of approximately $63 million of debt and equipment lease obligations for an aggregate of approximately $20 million of restructure notes and obligations due in installments commencing June 2003 through June 2006, 1.97 million shares of Class A Common Stock and warrants to purchase 1.8 million shares of Class A Common Stock. In addition, the Company purchased certain leased equipment for an aggregate purchase price of $3.5 million. The Company also recorded a net gain of $8.6 million upon the completion of the restructuring in accordance with FASB No. 15 during the fourth quarter of 2001.
The restructure notes bear interest at a rate of 12% per annum and mature five years from the date of the debt restructuring. The Company may elect to defer payment of accrued interest on a portion of the restructure notes until various dates commencing June 2003 and may elect to pay accrued interest on other restructure notes in shares of Class A common stock having a market value at the time of payment equal to 120% of the interest payment due. $9.1 million in principal amount of the restructure notes are convertible, at the option of the holder, into shares of Class A Common Stock of the Company at a conversion price of $10.00 per share, subject to adjustment in certain events. The Company will not be required to make scheduled principal payments on any of the notes until June 2003. A portion of the notes are subject to mandatory or optional prepayment prior to June 30, 2002 upon completion of certain equity financings payable 50% in Class A common stock and 50% in cash. All of the notes are callable at any time for cash. The warrants allow the holders to purchase shares of Class A Common Stock of the Company at an exercise price equal to $6.10 per share. The number of shares issuable upon exercise and the exercise price of the warrants are subject to adjustment in certain events. The warrants are exercisable for ten years after the date of the grant.
The restructure notes issued to AT&T Corp. and the former shareholder of STI have been accounted for in accordance with Financial Accounting Standards Board Statement No. 15, "Accounting by Debtors and Creditors for Troubled Debt Restructurings." Because the total future cash or share payments specified by the terms of these restructure notes, including both payments designated as interest and those designated as principal, are less than the carrying amount of these restructure notes, the Company was required to reduce the carrying amount of the original notes exchanged for the restructure notes issued to AT&T and such former STI shareholder to an amount equal to the total future cash payments specified by the new terms. In future periods, all payments under the terms of the restructure notes for which future interest was included in the carrying amounts of such notes shall be accounted for as reductions of such carrying amounts, and no interest expense shall be recognized on such notes for any period between the respective dates of commencement of the accrual of interest on such notes and the maturity dates of such notes.
The Company recognized a gain on the debt restructuring in the amount of $8.6 million. This gain was calculated based on the amount of the total reduction in carrying values of the original restructure obligations as compared to the carrying values of the restructure notes minus the amount of the contingent share issuance obligation of $1.1 million recorded by the Company due to the assumed payment of interest on a portion of the restructure notes in shares of Class A common stock as described above.
$5.875 million of the financing was represented by the investment of cash in exchange for 1,468,750 shares of Class A common stock. Approximately $1.3 million of this financing was represented by the investment of cash in exchange for senior convertible notes that are convertible into approximately 520,000 shares of Class A common stock, subject to adjustment in certain events. These notes are convertible at $2.50 per share. The beneficial conversion feature of $1.1 million is being amortized over a period of 5 years. Approximately $3.0 million of this financing was represented by the exchange of $1.4 million of cash equipment purchase obligations held by lessors and $1.6 million of other cash obligations held by AT&T for an aggregate of 820,000 shares of Class A common stock.
On July 15, 2002, the Company entered into a transfer and assignment agreement to repurchase a 12% senior convertible note and a payment obligation in the amount of $0.5 million for $90,000 in cash and 5,415 shares in Class A common stock, valued at approximately $6,000. This transaction was accounted for in accordance with Financial Accounting Standards Board Statement No. 15 ("FASB No.15"), "Accounting by Debtors and Creditors for Troubled Debt Restructurings." As a result of this transaction, the Company recorded a $0.4 million gain.
On September 27, 2002, the Company entered into a transaction agreement to repurchase 10% senior convertible notes in the amount of $4.95 million for $495,000. This transaction was accounted for in accordance with Financial Accounting Standards Board Statement No. 15 ("FASB No.15"), "Accounting by Debtors and Creditors for Troubled Debt Restructurings." As a result of this transaction, the Company recorded a $6.2 million gain in 2002 which includes the impact of a $1.7 million reversal of capitalized interest previously recognized in connection with the February 14, 2001 exchange agreement related to such notes.
Notes payable include the following, in thousands
(9) Revenues
The following are the components of revenues, in thousands:
For the year ended December 31, -------------------------------------------- 2002 2001 2000 ----------- ----------- ------------ Business messaging $ 113,874 $ 121,716 $ 28,967 Advertising.............. - 1,616 22,370 Subscriptions............ - - 719 Other.................... 480 597 642 ----------- ----------- ------------ Total revenues........... $ 114,354 $ 123,929 $ 52,698 =========== =========== ============
Other revenues consist of revenues generated principally from the sale or lease of domain names.
(10) Discontinued Operations
In March 2000, the Company formed World.com, Inc. in order to develop the Company's portfolio of domain names into independent web properties and subsequently acquired or formed its subsidiaries Asia.com, Inc. and India.com, Inc., in which World.com was the majority owner. On March 30, 2001, the Company announced its intention to sell all assets not related to its core outsourced messaging business including Asia.com, Inc., India.com, Inc. and its portfolio of domain names. Accordingly, World.com has been reflected as a discontinued operation.
The Consolidated Financial Statements of the Company have been restated to reflect World.com as a discontinued operation in accordance with APB Opinion No. 30. Accordingly, revenues, costs and expenses, assets, liabilities and cash flows of World.com have been excluded from the respective captions in the Consolidated Statement of Operations, Consolidated Balance Sheets and Consolidated Statements of Cash Flows and have been reported as "Loss from discontinued operations," "Net assets of discontinued operation," "Net liabilities of discontinued operations," and "Net cash used in discontinued operation," for all periods presented.
During 2001, the Company recorded a loss of $63 million to recognize the loss on discontinued operations. This loss includes a write-down of $56.4 million of assets, primarily goodwill, to net realizable value, operating losses, net of a gain of $8.3 million, $4.5 million, severance and related benefits of $1.3 million, and other related cost and expenses including the closure of facilities of $0.8 million.
Summarized financial information (In thousands) for the discontinued operation is as follows:
Statements of Operations Data Year Ended December 31,
2002 2001 2000 --------- --------- --------- Revenues............................. $ - $ 6,247 $ 8,527 ========= ========= ========= Loss from discontinued operations.... $ - $ 63,027 $ 70,625 ========= ========= =========
Balance Sheet Data As of December 31,
2002 2001 ------- ---------- Current assets..................................... $ 57 $ 74 Total assets....................................... 444 423 Current liabilities................................ 579 1,873 Long-term liabilities and minority interest........ 225 225 Net liabilities of discontinued operations $ (360) $ (1,675)
The information below pertains to certain events and activities associated with the operations of World.com and include: financings in connection with India.com, domain names included in discontinued operations, the acquisition and subsequent disposition of eLong.com, which was renamed to Asia.com, Inc., and other acquisitions made by World.com.
India.com Financing
During the third quarter of 2000, India.com, Inc., a wholly-owned subsidiary, issued 1,365,769 shares of Series A convertible preferred stock to private investors valued at $14.2 million. These shares were convertible into India.com Class A common stock at the initial purchase price of the preferred shares, subject to certain anti dilution and other adjustments. The holders of the Series A convertible exchangeable preferred stock were entitled to a one time right exercisable during the 60 days after September 13, 2001 to exchange these shares for the number of shares of EasyLink Class A common stock equal to the original purchase price of such shares divided by the lesser of the market price of EasyLink's Class A common stock on September 13, 2001 (but not less than $45.00) and $60.00. This exchange right was since modified as described below.
The Company entered into a Bridge Funding and Amendment Agreement with India.com, Inc. (the "Bridge Funding Agreement"). Under the Bridge Funding Agreement, the Company borrowed approximately $5 million from its majority-owned subsidiary India.com and issued to India.com bridge notes evidencing these borrowings (the "Bridge Notes"). Under the Bridge Funding Agreement, the Company issued to India.com warrants to purchase 20,000 shares of EasyLink's Class A common stock at an exercise price of $13.00 per share in consideration of the commitment under the Bridge Funding Agreement. In addition, India.com received warrants to purchase an additional 16,000 shares of EasyLink Class A common stock for each $1 million drawn down by the Company under the Bridge Funding Agreement. As a result of the drawings under the Bridge Funding Agreement, the Company issued an additional 80,000 warrants at exercise prices ranging from $6.20 to $14.00 per warrant.
In consideration of the commitments under the Bridge Funding Agreement, the period during which the one-time exchange right of the holders of India.com preferred stock was changed from the 60-day period immediately after September 13, 2001 to the 60-day period immediately after December 31, 2001. In addition, the floor price at which shares of EasyLink Class A common stock may be issued upon the exchange was reduced from $45.0 per share to $30.00 per share immediately upon execution and delivery of the Bridge Funding Agreement and was subject to further reduction to $12.50 per share for a percentage of the total number of shares of India Preferred Stock that is equal to the percentage of the Bridge Note drawn down.
Pursuant to an Exchange Agreement Amendment entered into on July 17, 2001 (the "Exchange Agreement Amendment") between the Company and the holders of India.com preferred stock, all of the holders of the outstanding shares of India.com preferred stock exercised their right to exchange their shares of India.com preferred stock for shares of the Company's Class A common stock based on the average of the closing market prices of the Company's stock over the five trading days ending on September 13, 2001, subject to a floor on the exchange price of $10.00 and a cap of $30.00 and subject to adjustment in certain circumstances. Based on the average of the closing prices of the Company's stock, the exchange price was $10.00 per share and 1,420,400 became issuable upon consummation of the exchange. As of September 30, 2001, the closing of the exchange transaction was subject to compliance with the requirements of the NASDAQ stock market. In addition, if the shares of Class A common stock issued in the exchange have not been registered for resale under an effective registration statement by December 31, 2001, the Company has agreed to issue to the former holders of India Preferred Stock an aggregate of 10,000 shares of its Class A common stock per month for each month after December 31, 2001 until the earlier of (i) the effectiveness of such a registration statement and (ii) the date on which such shares are eligible for resale pursuant to Rule 144 promulgated under the Securities Act. The Company entered into the Exchange Agreement Amendment in connection with the elimination of its obligations under the $5 million aggregate principal amount of bridge notes and the warrants to purchase an aggregate of 100,000 shares of the Company's Class A common stock issued to India.com.
On October 17, 2001, the Company and the holders of India.com preferred stock completed the exchange of India.com preferred stock for 1,420,400 shares of the Company's Class A common stock.
Software Tool and Die
On March 16, 2000, the Company acquired a domain name and made a 10% investment in Software Tool and Die, a Massachusetts company, in exchange for $2.0 million in cash and 18,569 shares of its Class A common stock valued at approximately $2.9 million. Software Tool and Die is an Internet Service Provider and provides Web hosting services. The Company concluded that the carrying value of this cost-based investment was permanently impaired based on the achievement of business plan objectives and milestones and the fair value of the investment relative to its carrying value. During the fourth quarter of 2000, the Company recorded an impairment charge of $4.2 million due to an other-than-temporary decline in the value of this investment. This amount is included in the loss from discontinued operations line in the 2000 statement of operations.
iFan, Inc.
In November 1999, the Company acquired iFan, Inc. ("iFan") a Web site with various domain names. The acquisition has been accounted for as an acquisition of assets. iFan had limited operations. The Company issued 7,270 shares of Class A common stock valued at approximately $1.6 million. The value was determined by using the average of the Company's Class A common stock surrounding the closing date, which occurred simultaneously with the announcement date. The Company is also obligated to pay $150,000 to the former owners for certain indebtedness. In addition, all iFan stock options were converted into 1,697 EasyLink non-qualified stock options at a weighted-average exercise price of $114.10 per share. The value ascribed to the options using the Black Scholes pricing model ($370,000) was part of the $2.1 million purchase price. The excess of the purchase price over the net book value of the domain assets has been allocated to other intangible assets (non compete agreements). Such amount is being ratably amortized over a period of three years, the expected period of benefit. In December 2000, the Company wrote off $160,000 of impaired domain names as part of its restructuring program.
eLong.com, Inc.
On March 14, 2000, the Company acquired eLong.com, Inc., a Delaware corporation ("eLong.com") for approximately $62 million including acquisition costs of $365,000. eLong.com, through its wholly owned subsidiary in the People's Republic of China ("PRC"), operates the Web Site www.eLong.com, which is a provider of local content and other internet services. Concurrently with the merger, eLong.com changed its name to Asia.com, Inc. ("Asia.com"). In the merger, the Company issued to the former stockholders of eLong.com an aggregate of 359,949 shares of EasyLink Class A common stock valued at approximately $57.2 million, based upon the Company's average trading price at the date of acquisition. All outstanding options to purchase eLong.com common stock were converted into options to purchase an aggregate of 27,929 shares of EasyLink Class A common stock. The value of the options was approximately $4.4 million based on the Black-Scholes pricing model with a 110% volatility factor, a term of 10 years, an weighted average exercise price of $12.40 per share and a weighted average fair value of $156.90 per share.
The acquisition was accounted for as a purchase business combination. The excess of the purchase price over the fair market value of the acquired assets and assumed liabilities of Asia.com has been allocated to goodwill ($62 million). Goodwill is being amortized over a period of 3 years, the expected estimated period of benefit. During the fourth quarter of 2000, approximately $7.8 million of goodwill was written off as it was determined that the carrying value had become permanently impaired as a result of the November 2, 2000 decision, as approved by the Board of Directors, to sell all assets not related to its core messaging business, including its Asia-based businesses. After giving effect to the write off, the net goodwill balance at December 31, 2000 was $38.2 million.
In addition, the Company was obligated to issue up to an additional 71,990 shares of Mail.com Class A common stock in the aggregate to the former stockholders of eLong.com if EasyLink or Asia.com acquired less than $50.0 million in value of businesses engaged in developing, marketing or providing consumer or business internet portals and related services focused on the Asian market or a portion thereof, or businesses in furtherance of such a business, prior to March 14, 2001. In May 2001, the Company issued 7,500 shares of Class A common stock in settlement of this contingency.
In the merger, certain former stockholders of eLong.com retained shares of Class A common stock of Asia.com, representing approximately 4.0% of the outstanding common stock of Asia.com. Under a Contribution Agreement with Asia.com, these stockholders contributed an aggregate of $2.0 million in cash to Asia.com in exchange for additional shares of Class A common stock of Asia.com, representing approximately 1.9% of the outstanding common stock of Asia.com. Pursuant to the Contribution Agreement, EasyLink (1) contributed to Asia.com the domain names Asia.com and Singapore.com and $10.0 million in cash and (2) agreed to contribute to Asia.com up to an additional $10.0 million in cash over the next 12 months and to issue, at the request of Asia.com, up to an aggregate of 24,242 shares of EasyLink Class A common stock for future acquisitions. As of June 30, 2000, the Company has fulfilled this obligation. See also "Asia.com Acquisitions", below. As a result of the transactions effected pursuant to the Merger Agreement and the Contribution Agreement, EasyLink initially owned shares of Class B common stock of Asia.com representing approximately 94.1% of the outstanding common stock of Asia.com. The company's ownership percentage decreased to 92% as of December 31, 2000. Asia.com granted to management employees of Asia.com options to purchase Class A common stock of Asia.com representing, as of December 31, 2000, 9% of the outstanding shares of common stock after giving effect to the exercise of such options.
Sale of eLong.com Inc.
On May 3, 2001, the Company's majority owned subsidiary Asia.com, Inc. sold its business to an investor group. Under the terms of the sale, the buyer paid Asia.com $1.5 million and assumed eLong.com liabilities of approximately $1.5 million. The consideration paid was determined as a result of negotiations between the buyer and EasyLink. In addition, the Company issued 20,000 shares of its Class A common stock valued at $138,000 in exchange for the cancellation of certain options granted to the former owners of eLong.com. The Company accounted for this transaction as part of the sale of the business of Asia.com. As a result of the sale, the Company recorded a loss on the sale of eLong.com, Inc. of $264,000. After the closing of the sale, the Company issued 36,232 shares in January 2002 to eLong.com, Inc. in full satisfaction of an indemnity obligation. The indemnity obligation arose out of eLong.com's settlement of a claim brought by former Lohoo shareholders for a contingent payment. Lohoo was previously acquired by eLong.com, Inc.
Asian Impairment Charges
The Company's management performs on-going business reviews and, based on quantitative and qualitative measures, assesses the need to record impairment losses on long-lived assets used in operations when impairment indicators are present. Where impairment indicators were identified, management determined the amount of the impairment charge by comparing the carrying value of goodwill and other long-lived assets to their fair values. These evaluations of impairments are based upon an achievement of business plan objectives and milestones of each business, the fair value of each ownership interest relative to its carrying value, the financial condition and prospects of the business and other relevant factors. The business plan objectives and milestones that are considered include among others, those related to financial performance, such as achievement of planned financial results and completion of capital raising activities, if any, and those that are not primarily financial in nature, such as launching or enhancements of a web site or product, the hiring of key employees, the number of people who have registered to be part of the associated business's web community, and the number of visitors to the associated business's web site per month. Management determines fair value based on the market approach, which includes analysis of market price multiples of companies engaged in lines of business similar to the business being evaluated. The market price multiples are selected and applied to the business based on the relative performance, future prospects and risk profile of the business in comparison to the guideline companies. As a result, during management's quarterly review of the value and periods of amortization of both goodwill and other long-lived assets, it was determined that the carrying value of goodwill and certain other intangible assets were not fully recoverable.
The business for which impairment charges were recorded (eLong.com) operates in the Chinese portal market, which has experienced a significant and continuing decline in revenue multiples over the past several quarters in comparison to the metrics in place at the time the acquisition was valued. In addition, both Chinese and US portals have experienced declines in operation and financial metrics over the past several quarters, primarily due to the continued weak overall demand of on-line advertising and marketing services combined with lower than expected e-commerce transactions, in comparison to metrics forecasted at the time of their respective acquisitions. These factors significantly impacted current projected revenue generated from this business. The impairment analysis considered that this business was recently acquired and that the intangible assets recorded upon acquisition of this business were being amortized over a three-year useful life. The amount of the impairment charge was determined by comparing the carrying value of goodwill and other long-lived assets to fair value at December 31, 2000. The methodology used to test for and measure the amount of impairment was based on the same methodology the Company used during its initial acquisition value of eLong.com. As a result management determined that the carrying value of eLong.com should be adjusted. Accordingly, during the fourth quarter of 2000, the Company recorded an impairment charge of approximately $7.8 million to adjust the carrying value of eLong. The impairment factors evaluated by management may change in subsequent periods, given that the business operates in a highly volatile business environment. This could result in material impairment charges in the future.
Asia.com Acquisitions
During the second quarter of 2000, Asia.com acquired three companies for approximately $18.4 million, including acquisition costs. Payment consisted of cash approximating $500,000, 192,618 shares of EasyLink Class A common stock valued at approximately $11.6 million and 467,345 shares of Asia.com Class A common stock valued at approximately $6.1 million, all of which were based upon the Company's average trading price at the date of acquisition. These acquisitions have been accounted for as purchase business combinations. The excess of the purchase price over the fair market value has been allocated to goodwill ($17.8 million) and is being amortized over a period of three years, the expected estimated period of benefit. During the fourth quarter of 2000, approximately $12 million of goodwill was written off as the Company determined that the carrying value of the goodwill associated with one of these acquisitions, focused in the wireless sector had become permanently impaired. The impairment results from the November 2, 2000 decision, as approved by the Board of Directors, to sell all assets not related to its core outsourcing business, including its Asia-based businesses. After giving effect to the writeoff, the net goodwill balance at December 31, 2000, was $3.2 million.
Under a stock purchase agreement associated with one of the acquisitions, the Company agreed to pay a contingent payment of up to $5 million if certain wireless revenue targets are reached after the closing. The contingent payment was payable in EasyLink Class A common stock, cash or, under certain circumstances, Asia.com Class A common stock. Management currently does not expect to achieve these wireless revenue targets and, accordingly, does not expect to issue any additional consideration.
Mauritius Entity
On March 31, 2000, the Company acquired 100% of a Mauritius entity, which in turn owned 80% of an Indian subsidiary. The terms were $400,000 in cash and a $1 million 7% note payable one year from closing. The acquisition was accounted for as a purchase business combination. The excess of the purchase price over the fair market value of the assets acquired and assumed liabilities of the Mauritius entity has been allocated to goodwill ($2.1 million). Goodwill is being amortized over a period of five years, the expected estimated period of benefit.
In June 2000, the Company acquired, through the Mauritius entity, the remaining 20% of the Indian subsidiary for $2.2 million. The acquisition was accounted for as a purchase business combination. The excess of the purchase price over the fair market value of the assets acquired has been allocated to goodwill ($2.2 million), and is being amortized over a period of five years, the expected estimated period of benefit.
In connection with the Mauritius acquisition, the Company incurred a $1.8 million charge related to the issuance of 10,435 shares of Class A common stock, as compensation for services performed, $200,000 cash and an additional $200,000 payable in EasyLink Class A common stock as compensation for employees.
On October 31, 2001, the Company's India.com, Inc. subsidiary sold 90% of the share of its Multiple Zones Prvt. Ltd. Subsidiary. The Company recorded a nominal gain on the transaction.
India Acquisition and Divestiture
During the second quarter of 2001, the Company acquired a US and India based company for approximately $600,000, including acquisition costs. The terms were $300,000 in cash and 19,600 shares of EasyLink Class A common stock valued at approximately $272,000 based upon our average trading price surrounding the date of acquisition. The acquisition was accounted for as a purchase business combination. The excess of the purchase price over the fair market value of the assets acquired and assumed liabilities has been allocated to goodwill ($831,000), which was being amortized over a period of three years, the expected estimated period of benefit.
The Company subsequently transferred this acquired business to the former management of its India.com subsidiary. As part of the transaction, the transferred business assumed all of the liabilities of the transferred business and certain liabilities of India.com. In consideration for the assumption of these liabilities, the Company contributed to the transferred business immediately prior to the sale in January 2002 56,075 shares of Class A common stock valued at $0.3 million and $300,000 in cash.
(11) Partner Agreements
The Company entered into partner agreements in connection with the advertising network business. Included in these agreements are percentage of revenue sharing agreements, miscellaneous fees and other customer acquisition costs with EasyLink Partners. The revenue sharing agreements vary for each party but typically are based on selected revenues, as defined, or on a per sign-up basis. At December 31, 2002 and 2001, the Company's liabilities were approximately $0.1 million to various EasyLink Partners under such agreements.
Prior to 2000, the Company had issued stock to some of its EasyLink Partners and capitalized such issuances when the measurement date for such stock grants was fixed and there was a sufficient disincentive to breach the contract in accordance with Emerging Issues Task Force Abstract No. 96-18, "Accounting for Equity Instruments That are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or Services." Such amounts are amortized ratably over the length of the contract commencing on the site launch date.
In August 1998, the Company entered into a two-year agreement with CNN. In consideration of the advertising, subscription and customer acquisition opportunities, CNN received 25,353 shares of Class A common stock upon the commencement of the contract at $35.00 per share, the fair market value of EasyLink's common stock on the date of grant, or $887,000. CNN also has the right to receive a portion of the Company's selected revenues under the agreement, as defined. The value of the stock issuance has been recorded in the balance sheet as partner advances and is being amortized ratably to amortization expense over the contract term. The launch of the services coincided with the contract date. The Company recorded approximately $270,000 and $444,000 of amortization expense in 2000 and 1999, respectively.
The Company issued an additional 48,562 and 57,763 shares of its common stock at varying prices in 1999 and 1998 respectively, in connection with certain strategic partnership agreements. When stock issuances are either contingent upon the achievement of certain targets or the measurement date is not fixed, the Company expenses the issuance of such stock at the time such stock is issued or the targets are achieved at the then fair market value of the Company's stock. Such amounts aggregated approximately $2.5 million and $2.8 million for the years ended December 31, 1999 and 1998 respectively, and are included in sales and marketing expenses in the statement of operations. The Company no longer issues stock in connection with its strategic partnership agreements.
Prior to May 1, 1999, the Company was required to issue to CNET, Snap and NBC Multimedia shares of its Class A common stock for each member who registers at their sites. On May 1, 1999, the Company entered into an agreement to settle in full its contingent obligation to issue shares of its Class A common stock to CNET, Snap and NBC Multimedia as described above. Pursuant to this agreement, the Company issued upon the closing of its initial public offering in June 1999, 236,891 shares of Class A common stock at a value of $70.00 per share in the aggregate to CNET and Snap and 21,000 shares of Class A common stock at a value of $70.00 per share to NBC Multimedia. The Company capitalized $18 million in connection with the issuance of these shares and is ratably amortizing the amount over the period from the closing of the initial public offering (June 23, 1999) through May 2001. The Company recorded approximately $2.3 million, $9.2 million and $5.0 million of amortization expense for the years ended December 31, 2001, 2000 and 1999, respectively. The remaining $1.5 million of unamortized costs were written off as a part of the loss on sale of the advertising network during 2001.
Certain agreements were assigned to Net2Phone in conjunction with the sale of the advertising network.
(12) Leases
The Company sold certain assets for approximately $1.3 million during 2000 and these assets were leased back from the purchaser over terms of 3 to 5 years.
On March 30, 2000, the Company entered into a $12 million Master Lease Agreement with GATX Technology Services Corporation ("GATX") for equipment lease financing (hardware and software). Terms of individual leases signed under the Master Lease Agreement called for a 36-month lease term with rent payable monthly in advance. The effective interest rate was 12.1% and was adjustable based on prime. GATX held a first priority security interest in the equipment under the facility. For certain leases entered into under the $12 million master lease agreement, the Company has exercised an option to extend the term for an additional 24 months.
Under terms of the Master Lease Agreement, the Company had the option to purchase the equipment at the then fair market value of the equipment at lease expiration. In December 2000, GATX reduced the $12 million line to $10.4 million, the amount that was drawn down and outstanding at December 31, 2000.
On March 31, 2000, the Company entered into a $2 million Master Lease Agreement with Leasing Technologies International, Inc. The lease line provided for the lease of new, brand name computers, office automation and other equipment. Terms of individual leases signed under the Master Lease Agreement called for a 36-month lease term, rent payable monthly in advance. The effective interest rate was 14.7% and was adjustable based on prime. In addition, a security deposit equal to one month's rent was payable at each individual lease inception. In December 2000, Leasing Technologies reduced the $2 million line to $1.2 million, the amount that was drawn down and outstanding at December 31, 2000.
Under terms of the Master Lease Agreement at the end of the lease term, the Company had the option to either purchase or return the equipment at a set percent of the original price, or extend the lease term by twelve months. In the latter case, the lease terms provided for a discounted monthly rental and a bargain purchase option at the expiration of the twelve-month extension.
On November 27, 2001, the Company closed on the restructuring of these obligations. These obligations were converted into a package of securities consisting of senior convertible notes and other obligations. See Note 8 Notes Payable for a description of the debt restructuring. In addition, the Company settled certain leased equipment obligations having an original equipment cost of $22.5 million for an aggregate purchase price of approximately $3.5 million.
The Company leases facilities and certain equipment under agreements accounted for as operating leases. These leases generally require the Company to pay all executory costs such as maintenance and insurance. Rent expense for operating leases for the years ending December 31, 2002, 2001 and 2000 was approximately $2.2 million, $4.3 million, and $6.0 million, respectively.
The Company's lease obligations are collateralized by certain assets at December 31, 2002. Future minimum lease payments under non-cancelable operating leases (with initial or remaining lease terms in excess of one year) and future minimum capital lease payments as of December 31, 2002 are as follows, in thousands:
Year ending December 31,
(13) Related Party Transactions
Federal Partners, L.P. Financings
On January 8, 2001, we issued $5,000,000 principal amount of 10% Senior Convertible Notes due January 8, 2006 to Federal Partners, L.P. The Clark Estates, Inc. provides management and administrative services to Federal Partners. Federal Partners and accounts for which The Clark Estates, Inc. provides management and administrative services are beneficial holders of 9.9% of the Company's common stock, including shares issuable upon conversion of senior convertible notes held by Federal Partners but excluding shares issuable upon the conversion or exercise of other notes, warrants or options. On March 20, 2001, we issued to Federal Partners, L.P. 300,000 shares of our Class A Common Stock for a purchase price of $3,000,000, and we committed to issue to Federal Partners an additional 100,000 shares of Class A Common Stock if the closing price of our Class A Common Stock on the principal securities exchange on which they are traded was not at or above $100 per share for 5 consecutive days. The additional shares were issued in 2002. As part of the financing completed on November 27, 2001 in connection with our debt restructuring, we issued to Federal Partners an aggregate of 250,369 shares of Class A common stock for a purchase price of $1,700,000, and we committed to issue to Federal Partners an additional 174,632 shares of Class A Common Stock if the average of the closing prices of our Class A Common Stock on Nasdaq was not at or above $16.00 per share for the 10 consecutive trading days through year end 2001.
In connection with the issuance of the senior convertible notes on January 8, 2001, we granted to Federal Partners, L.P. the right to designate one director to our Board of Directors so long as Federal Partners, L.P. and other persons associated with it owns at least 300,000 shares of Class A Common Stock, including shares issuable upon conversion of or in payment of interest on the senior convertible notes. Federal Partners, L.P. designated Stephen Duff and he was appointed to our Board on January 8, 2001. Mr. Duff is a Senior Investment Manager for The Clark Estates, Inc. and is Treasurer and a limited partner of Federal Partners, L.P. The Clark Estates, Inc. provides management and administrative services for Federal Partners, L.P. Through his limited partnership interest in Federal Partners, L.P., Mr. Duff has an indirect interest in $10,000 principal amount of the senior convertible notes issued on January 8, 2001, in 600 of the shares of Class A Common Stock issued to Federal Partners, L.P. on March 20, 2001 and in 850 of the shares of Class A Common Stock issued to Federal Partners, L.P. in connection with the November 27, 2001 financing.
Acquisition of Swift Telecommunications, Inc.
We acquired Swift Telecommunications, Inc. on February 23, 2001. George Abi Zeid was the sole shareholder of Swift Telecommunications, Inc ("STI"). In connection with the acquisition, Mr. Abi Zeid was elected to the Board of Directors of the Company and was appointed President - International Operations. EasyLink Services paid $835,294 in cash, issued 1,876,618 shares of Class A Common Stock and issued a promissory note in the original principal amount of approximately $9.2 million to Mr. Abi Zeid in payment of the purchase price for the acquisition payable at the closing. Under the merger agreement, EasyLink Services also agreed to pay additional contingent consideration to Mr. Abi Zeid equal to the amount of the net proceeds, after satisfaction of certain liabilities of STI and its subsidiaries, from the sale or liquidation of the assets of one of STI's subsidiaries. The $9.2 million note was payable in four equal semi-annual installments over two years. The note was non-interest bearing except in certain circumstances. Pursuant to the debt restructuring completed on November 27, 2001, EasyLink issued $2,682,964 principal amount of restructure notes, 268,295 shares of Class A common stock and warrants to purchase 268,295 shares of Class A common stock in exchange for Mr. Abi Zeid's $9.2 million note. See Note 8 Notes Payable.
In connection with the acquisition by STI on January 31, 2001 of the EasyLink services business from AT&T Corp., Mr. Abi Zeid pledged to AT&T Corp. under a Pledge Agreement dated January 31, 2001 all of the shares of EasyLink Services Class A Common Stock that he was entitled to receive pursuant to the acquisition to secure a $35 million note issued to AT&T Corp. by STI and assumed by EasyLink Services as part of the purchase price for the EasyLink Services business. As a result of the debt restructuring completed on November 27, 2001, these shares now secure the $10 million principal amount of restructure notes issued to AT&T Corp. in exchange for the $35 million note held by it.
In connection with the acquisition of STI on February 23, 2001, the Company also entered into a conditional commitment to acquire Telecom International, Inc. ("TII"). TII was an affiliate of STI prior to the acquisition of STI by the Company. George Abi Zeid is a principal beneficial shareholder of TII. The purchase price for TII was originally agreed to be US$117,646 in cash, a promissory note in the aggregate principal amount of approximately $1,294,118 and 267,059 shares of the Company's Class A common stock. In order to facilitate the debt restructuring and to reduce the Company's debt obligations and cash commitments, the parties agreed to modify the Company's commitments in respect of TII. In lieu of acquiring TII, the Company purchased certain assets owned by TII for six monthly payments of $10,000 commencing May 27, 2002 and one payment of $190,000 on November 27, 2002. The Company also agreed to reimburse TII for up to 50% of TII's payments on certain accounts payable up to a maximum reimbursement of $200,000, to cancel a $236,490 payable owed by STI to the Company and to issue up to 20,000 shares of Class A common stock to TII. In addition, the Company issued 300,000 shares of Class A common stock to TII.
As part of the transaction with STI, EasyLink Services also entered into a conditional commitment to acquire the 25% minority interests in two STI subsidiaries for $47,059 in cash, promissory notes in the aggregate principal amount of approximately $517,647 and 106,826 shares of Class A Common Stock. This transaction is subject to certain conditions, including satisfactory completion of due diligence, receipt of regulatory approvals and other customary conditions.
Mr. Abi Zeid also agreed to contribute up to approximately 1.2 million shares of Class A common stock issuable to him in connection with the debt restructuring in order to permit the grant of shares or options to employees. The shares which were valued at $0.5 million were accounted for as compensation expense in the fourth quarter of 2001.
Fax-2 Acquisition and Divestiture
Under an Exclusivity and Royalty Agreement among Daniel Kuehler, Kurt Winter and EasyLink Services dated May 30, 2000, EasyLink Services acquired from Messrs. Kuehler and Winter the rights to develop, market and deploy the Fax-2 business concept. Fax-2 allows users to send faxes to any email address. Mr. Kuehler is the son of Jack Kuehler, a director of EasyLink Services until September 30, 2002. Each of Messrs. Kuehler and Winter received 1,000 shares of EasyLink Services Class A Common Stock upon execution of the agreement and were entitled to a 10% royalty up to $100,000 on all revenue generated by Fax-2 and thereafter a 1% royalty on such revenue so long as specified performance and operating conditions were maintained. Mr. Kuehler also entered into an employment agreement which entitled him to receive full compensation and benefits through June 15, 2001 if his employment is terminated for any reason other than cause before then. Mr. Kuehler also received on June 15, 2000 a grant of 3,000 options at an exercise equal to fair market value at the time of grant. These options were to vest over four years. The Fax-2 service was re-named the FaxMail Service while owned by the Company.
On October 4, 2001, the Company and Messrs. Kuehler and Winter entered into a Divestiture Agreement which superceded the Exclusivity and Royalty Agreement. Under the Divestiture Agreement, the Company transferred to an entity formed by Messrs. Kuehler and Winter and to be named FaxMail exclusive permanent rights to develop, market and deploy the FaxMail Service. Under the Divestiture Agreement, the Company would own 10% of FaxMail. Under the arrangement, the parties agreed that the Company would also be entitled to receive a royalty on all business referred by it to FaxMail equal to 20% of the gross revenues of the business referred. The parties also agreed that each party would have independent ownership of certain technology underlying the FaxMail Service as of the date of the Divestiture Agreement and the Company would have the right to license future modifications, enhancements or replacements to the FaxMail Service developed by FaxMail.
(14) Capital Stock
Reverse Stock Split
Effective January 23, 2002, the Company authorized and implemented a 1 for 10 reverse stock split. Accordingly, all share and per share amounts in the accompanying consolidated financial statements have been retroactively restated to reflect the reverse stock split.
Authorized Shares
In 2001, the Company amended its amended and restated certificate of incorporation, as amended, in order to increase the number of authorized shares up to 570,000,000 consisting of 500,000,000 and 10,000,000 shares of Class A and Class B common stock, respectively; and 60,000,000 undesignated shares of preferred stock, all classes with a par value of $0.01 per share. These amounts continue to represent the respective numbers of authorized shares of the Company as of the date hereof.
Common Stock
Voting Rights
Each share of Class A common stock has one vote per share. Each share of Class B common stock, which is owned by the Chairman, shall have ten votes per share, and may convert into one share of Class A common stock.
Liquidation Preference
In the event the Company is liquidated, dissolved or wound up, the holders of Class A and Class B common stock will be entitled to receive distributions only after satisfaction of all liabilities and the prior rights of any outstanding class of preferred stock. If the Company is liquidated, dissolved or wound up, its legally available assets after satisfaction of all liabilities shall be distributed to the holders of Class A and Class B common stock pro rata based on the respective numbers of shares of Class A common stock held by these holders or issuable to them upon conversion of Class B common stock.
Private Placements of Common Stock
On March 20, 2001, the Company completed a private placement of 300,000 shares of Class A common stock (the "Common Shares") with a private investor for an aggregate price of $3,000,000. Pursuant to the Common Stock Purchase Agreement dated as of March 13, 2001 between the Company and the private investor and subject to the effectiveness of a registration statement covering shares of Class A common stock issuable upon conversion of certain convertible notes, EasyLink is obligated to issue an additional 100,000 shares of Class A common stock to the private investor if the closing price of the Company's Class A common stock is not at or above $100 per share for at least five consecutive trading days during 2001. These shares were issued in January 2002.
India.com, Inc. Preferred Stock Exchange
On October 17, 2001, the Company and the holders of India.com preferred stock completed the exchange of India.com preferred stock for approximately 1.4 million shares of the Company's Class A common stock valued at approximately $6.1 million. See Note 9 Discontinued Operations.
Settlements
During 2002 and 2001, the Company issued 226,391 and 878,838 shares of Class A common stock, respectively, in connection with various settlements of certain obligations and for payment of services rendered valued at $706,000 and $6.6 million, respectively, in the aggregate. The 2002 issuance is comprised of 106,534 shares in connection with vendor settlement, 21,016 shares in connection with third party vendors, 36,232 in connection with Lohoo settlement, 56,075 shares in connection with MyIndia.com sale, 6,534 shares in connection with MyIndia.com contingent liability. The 2001 issuance is comprised of 196,604 shares in connection with vendor settlements, 300,000 shares in connection with the TII settlement, 162,083 shares in connection with the TCOM settlement, 103,359 shares in connection with payment of a promissory note, 53,319 shares in connection with merger agreements and 33,292 shares in connection with Asia.com settlements, 10,590 shares in connection with India.com settlements, and 19,591 shares in connection with New Millenium settlement. In addition, 888,810 and 294,533 shares of Class A common stock were issued during 2002 and 2001, respectively, in lieu of cash interest payments on Senior Convertible Notes and subordinated debentures valued at $1.8 and $0.6 million, respectively, in the aggregate.
Common Stock and Warrants issued in Debt Restructuring and Related Financing
Under the terms of the Company's debt restructuring completed on November 27, 2001, the Company exchanged an aggregate of approximately $63 million of debt and equipment lease obligations for an aggregate of approximately $20 million of restructure notes and obligations due in installments commencing June 2003 through June 2006, 1.97 million shares of Class A Common Stock valued at $12.0 million and warrants to purchase 1.8 million shares of Class A Common Stock valued at $0.5 million. $9.1 million in principal amount of the restructure notes are convertible into shares of Class A common stock at a conversion price of $10.00 per share, subject to adjustment.
As a condition to the debt restructuring, the Company completed a financing. $5.875 million of this financing was represented by the investment of cash in exchange for 1,468,750 shares of Class A common stock. Approximately $3.0 million of this financing was represented by the exchange of $1.4 million of cash equipment purchase obligations held by lessors and $1.6 million of other cash obligations held by AT&T for an aggregate of 820,000 shares of Class A common stock.
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, 2002 and 2001, 60,000,000 authorized shares of undesignated preferred stock were available for creation and issuance in this manner.
(15) AT&T Warrant
Under a letter agreement dated May 26, 1999, AT&T Corp. ("AT&T") and the Company agreed to negotiate in good faith to complete definitive agreements to establish a strategic relationship. On July 26, 1999, the Company entered into an interim agreement to provide the Company's e-mail services as part of a package of AT&T or third party branded communication services that AT&T may offer to some of its small business customers. The Company has not entered into a definitive agreement to establish the proposed strategic relationship, and, effective March 30, 2000, the May 26, 1999 letter agreement and the July 26, 1999 Interim Agreement were terminated. Under the May 26, 1999 letter agreement, Mail.com issued warrants to purchase 100,000 shares of Class A common stock at $110.00 per share. AT&T had the option to exercise the warrants at any time on or before December 31, 2000. Since AT&T did not exercise the warrants on or before December 31, 2000, the warrants expired and were cancelled.
The Company recorded a deferred cost of approximately $4.3 million in the aggregate as a result of the issuance of these warrants to AT&T. As a result of the termination of the May 26 letter agreement and the July 26 interim agreement, $3.3 million of deferred costs were expensed during 2000.
(16) Stock Options
During 1998, 40,298 options were issued to a key executive at an exercise price of $20.00 per share, all of which were granted in 1998. Such options were outside of the Company's Stock Option Plans and contingent upon the Company achieving specified advertising revenue targets, as defined. For the year ended December 31, 1998, the Company recorded deferred compensation expense of approximately $1.1 million in the aggregate in connection with these grants, representing the difference between the deemed fair value of the Company's stock at the date of each grant and the $20.00 per share exercise price of the related options. This amount is presented as a reduction of stockholders' equity (deficit) and is being amortized over the three-year vesting period from the achievement of the performance targets, which was concurrent with each option grant. The Company has amortized $274,000, $365,000 and $71,000 of deferred compensation related to this grant for the years ended December 31, 2000, 1999 and 1998, respectively. During the fourth quarter of 2000, the officer's employment terminated and the remaining $387,000 of unamortized deferred compensation representing the unvested options forfeited was offset against to additional paid-in capital.
In 2001, the Company recorded compensation expense of approximately 0.5 million for a transfer of common stock and stock options from an officer to certain employees. (See Note 13, Related Party Transactions -- Acquisition of Swift Telecommunications Inc.)
During 2000, certain non-bonus eligible employees purchased 635 common stock options for $100 per share in cash having an exercise price of $146.30 per share, the fair market value at the date of the grant.
During 2001, the Company granted to its employees and directors under its stock option plans a total of 973,017 options to purchase shares of Class A common stock with an average exercise price of $4.64 per share. As of December 31, 2002, the Company had a total of options outstanding with an average exercise price of $13.50 per share.
In connection with the Company's debt restructuring, the Company issued upon the closing of the restructuring, warrants to purchase 1.8 million shares of Class A common stock at $6.10 per share. See Note 8 Notes Payable for a description of the restructuring and the warrants.
A summary of the Company's stock option activity and weighted average exercise prices is as follows:
The following table summarizes information about stock options outstanding and exercisable at December 31, 2002:
On May 31, 2000, the Board of Directors approved the cancellation and re-issuance of 50,000 options to an executive at an exercise price of $55.30 per share based on the closing price of the Company's Class A common stock on May 31, 2000. The options had an original exercise price of $124.40. The new options vest at the same rate that they would have vested under previous plans. Pursuant to FIN 44, stock options re-priced after December 15, 1998 are subject to variable plan accounting. To date, the Company has not recorded any compensation charge as the fair market value of the Company's common stock has been below the new exercise price.
On November 14, 2000, the Company offered to certain employees, officers and directors, including the executive mentioned above, other than the chairman, the right to re-price certain outstanding stock options to an exercise price equal to $16.90, the closing price of the Company's Class A common stock on NASDAQ on November 14, 2000. Options to purchase an aggregate of up to 632,799 shares were repriced. As of December 31, 2001 options to purchase 532,595 shares were outstanding. The re-priced options will vest at the same rate that they would have vested under their original terms except that shares issuable upon exercise of these options may not be sold until after November 14, 2001. Pursuant to FIN 44, since the new exercise price was equal to the fair market value of the Company's common stock on the new measurement date, the Company did not record any compensation cost in connection with this program. However, depending upon movements in the market value of the Company's Class A common stock, this accounting treatment may result in significant non-cash compensation charges in future periods. To date, the Company has not recorded any compensation charge as the fair market value of the Company's common stock has been below the new exercise price.
(17) Employee Stock and Savings Plans
401(k) Plan
On January 3, 2000, the Company established a 401(k) Plan ("the plan"). Subject to Internal Revenue Service Code limitations, participants may contribute from 1% to 15% of pay each pay period on a before tax basis, subject to statutory limits. Such contributions are fully and immediately vested. The Company will match 50% of the first 6% of an employee's contribution with shares of Class A common stock. Vesting of the Company's matching contributions begins at 20% after the first anniversary of date of hire or plan commencement date, whichever is later, increasing by 20% each year thereafter through the fifth year until full vesting occurs. The Company's matching contributions representing 314,642, 75,209 and 15,120 shares of Class A common stock for the year ended December 31, 2002, 2001 and 2000 were $437,000, $412,000 and $534,000, respectively.
Upon the acquisition of STI, the Company has various 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 participants contribution. Vesting of the Company's matching contribution is immediate. The Company's matching contributions for the year ended December 31, 2002 and 2001 were $454,000 and $220,000, respectively.
Employee Stock Purchase Plan
On March 14, 2000, the Board of Directors adopted, and on May 18, 2000, the shareholders approved the EasyLink Employee Stock Purchase Plan (the "ESPP"). Eligible employees can contribute, through a payroll deduction in 1% increments, from a minimum of 1% to a maximum of 10% of base salary or wages. Each purchase period lasts for six months beginning on the first day of January and the first day of July. The purchase price is set at 85% of the lower of the fair market value of EasyLink Class A common stock on the first day of the purchase period or on the last day of the purchase period. The fair market value will be determined based on the closing sales price on the NASDAQ National Market. If EasyLink shares cease to be traded on the NASDAQ National Market, a committee of at least two members of the board of directors will determine the fair market value in the manner prescribed by the plan. During 2001 and 2000, employees purchased 3,869 and 6,044 shares at an average price of $4.91 and $6.10 per share, respectively. At December 31, 2001, approximately 94,000 shares were reserved for future issuances.
During 2001, the Company decided to discontinue any active participation in the ESPP. This resulted in freezing the plan effective June 30, 2001. The Company has the option of reinstating the plan at a later date.
(18) Restructuring Charges
During 2002, 2001 and 2000, restructuring charges of $2.3 million, $25.3 million and $5.3 million, respectively, were recorded by the Company in accordance with the provisions of EITF 94-3, and Staff Accounting Bulletin 100. During 2002, the Company's restructuring initiatives are 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 will begin in the first quarter of 2003. The restructuring charges are comprised of abandonment costs with respect to leases, including the write-off of leasehold improvements. During 2001, the Company's restructuring initiatives are related to our strategic decisions to exit the consumer messaging business and to focus on the Company's outsourced messaging business. The Company's restructuring program included an incremental reduction in the workforce of approximately 150 employees. Employees affected by the restructuring were notified by direct personal contact and by written notification. The remaining employee benefit termination amounts will be paid out in 2002. In addition, asset disposals of $24.1 million reflect write-downs of excess fixed assets and other assets to their net realizable values. The lease abandonments represent the cost to exit the facility leases. The remaining amounts are to be paid out over the next 3 years which corresponds to the terms of the lease.
The following sets forth the activity in the Company's restructuring reserve (in thousands):
(19) Income Taxes There is no provision for federal, state or local, and foreign income taxes for all periods presented, since the Company has incurred losses since inception. At December 31, 2002 and 2001, the Company had approximately $188.4 and $178.7 million, respectively, of federal net operating loss carryforwards available to offset future taxable income. Such carryforwards expire in various years through 2022. The Company has recorded a full valuation allowance against its deferred tax assets since management believes that, after considering all the available objective evidence, it is not more likely than not that these assets will be realized. The tax effect of temporary differences that give rise to significant portions of federal deferred tax assets principally consists of the Company's net operating loss carryforwards.
Under Section 382 of the Internal Revenue Code of 1986, as amended (the "Code"), the utilization of net operating loss carryforwards may be limited under the change in stock ownership rules of the Code. As a result of numerous historical equity transactions, management believes the Company has experienced an "ownership change," as defined by Section 382. The Company is in the process of determining when such an ownership change would have occurred. Accordingly, the utilization of net operating loss carryforwards would be subject to an annual limitation and would be significantly limited in offsetting future taxable income.
The effects of temporary differences and tax loss carryforwards that give rise to significant portions of federal deferred tax assets and deferred tax liabilities at December 31, 2002 and 2001 are presented below, in thousands.
December 31, 2002 2001 ------------ --------- Deferred tax assets: Net operating loss carryforwards ...... $ 79,548 $ 75,026 Deferred revenues ..................... - 422 Accounts receivable principally due to allowance for doubtful accounts ...... 2,277 6,294 Non-cash compensation ................. 3981 594 Plant and equipment, principally due to differences in depreciation .......... 1,416 828 Write down of assets and investments .. 7,038 4,894 Accrued expenses ...................... 590 2,583 Restructuring reserve ................. 801 973 Other ................................. 112 118 ------------ Gross deferred tax assets ............. 92,180 91,732 Less: valuation allowance ............. (92,180) (91,732) ------------ --------- Net deferred tax assets ........ $ - $ - ============ =========
Of the total deferred tax assets of $92.2 million existing on December 31, 2002, subsequently recognized tax benefits, if any, in the amount of approximately $5.6 million will be applied directly to contributed capital when realized. This amount relates to the tax effect of deductions for stock options included in the Company's net operating loss carryforward.
(20) Valuation and Qualifying Accounts
Additions and write-offs charged to the allowance for doubtful accounts is presented below, in thousands.
(21) Geographic Information
Summarized information by geographic location is as follows:
Year Ended December 31, ------------------------------------------ 2002 2001 2000 ----------- ------------ ------------
North America: Revenues $ 89,356 $ 100,442 $ 52,698 Operating loss (84,543) (168,019) (151,498) Total assets 58,704 161,366 306,917 Long-lived assets 34,317 129,331 210,819
Europe: Revenues 20,940 19,032 - Operating loss (1,798) (3,755) - Total assets 2,453 7,758 - Long-lived assets 938 1,599 -
Asia: Revenues 4,058 4,455 - Operating loss (592) (467) - Total assets (146) 1,118 - Long-lived assets 606 712 -
(22) Commitments and Contingencies
Master Carrier Agreement
In connection with the acquisition of the EasyLink Services business from AT&T Corp., The Company entered into a Master Carrier Agreement with AT&T. Under this agreement, AT&T will provide the Company with a variety of telecommunications services that are required in connection with the provision of the Company's services. The term of the agreement for network connection services is 36 months through May 2005 and the term of the agreement for private line and satellite services is 36 months, through February 2004. Under the agreement, the Company has a minimum revenue commitment for network connection services equal to $3 million for each of the three years of the contract. In addition, we have a minimum revenue commitment for private line and satellite services equal to $375,000 per month during the three-year term. If the Company terminates the network connection services or the private line and satellite services prior to the term or AT&T terminates the services for our breach, the Company must pay to AT&T a termination charge equal to 50% of the unsatisfied minimum revenue commitment for these services for the period in which termination occurs plus 50% of the minimum revenue commitment for each remaining commitment period in the term.
Other Telecommunications Services
The Company has committed to purchase from MCI Worldcom a minimum of $75,000 per month in other telecommunications services through January 2005.
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; and contract claims. These claims include pending claims that some of our services employ technology covered by third party patents. These claims, even if not meritorious, could require the Company 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, the Company may be required to discontinue use of any infringing technology, to pay damages and/or to pay ongoing license fees which would increase the Company's costs of providing the service.
The Company has also received notices or claims from certain third parties for disputed and unpaid accounts payable. The Company believes that it has appropriately reserved for the amount of any liability that may arise out of these matters, and management believes that these matters will be resolved without a material effect on the Company's financial position or results of operations.
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. This judgment has been subsequently vacated by the Court and additional proceedings are pending before the Court. See Note (24) - Legal Proceedings.
(23) Quarterly Financial Information - Unaudited
Condensed Quarterly Consolidated Statements of Operations (in thousands, except per share data)
Due to changes in the number of shares outstanding, quarterly loss per share amounts do not necessarily add to the totals for the years.
(1) Included in operating expenses are impairment and restructuring charges of $79,394 in Q4 2002, $60,000 in Q4 2001, $50 in Q3 2001, $15,248 in Q2 2001, $12,239 in Q1 2001. Also included in operating expenses is a gain on sale of business of $0.3 million and a loss on sale of business of $1.8 million in Q1 2001.
(2) Included in other income/(expense) are impairment charges of $1,515 in Q4 2002, $7,463 in Q2 2001, $2,668 in Q1 2001.
(24) Subsequent Events - Unaudited
Debt Settlements
The Company recently announced that it is seeking to eliminate substantially all of its indebtedness for borrowed money. Pursuant to these efforts, the Company eliminated approximately $7.1 million principal amount of debt after December 31, 2002 through the date hereof in exchange for the payment of approximately $0.8 million in cash and the issuance or commitment to issue approximately 1.1 million shares of our Class A common stock. These transactions will result in a gain of approximately $6.6 million which will be recorded in the first quarter of 2003. As a result of this transaction, the Company also eliminated $0.7 million of capitalized interest and $0.2 million of accrued interest associated with the debt eliminated. The Company may issue additional shares or securities convertible into or exercisable for shares of Class A common stock in connection with raising any capital needed to fund cash payments for any additional debt that it may eliminate. Holders of substantially all indebtedness on which the Company currently owes accrued but unpaid interest payments have agreed to defer such payments pending completion of our debt restructuring in most cases until April 30, 2003 or May 31, 2003.
Legal Proceedings
On February 27, PTEK Holdings, Inc., one of the Company's principal competitors, announced that it had entered into an agreement with AT&T to purchase 1,423,980 shares of outstanding Class A common stock of the Company held by AT&T and a promissory note of the Company held by AT&T. The promissory note, with a principal amount of $10 million, represents approximately 13% of the aggregate principal amount of debt that the Company has been seeking to eliminate pursuant to its debt restructuring plan. In response to PTEK's announcement, the Company commenced on March 17, 2003 an action against AT&T Corp., PTEK Holdings, Inc. and PTEK's subsidiary Xpedite Systems, Inc. The suit seeks, among other things, to enjoin AT&T from selling the promissory note held by AT&T to PTEK, to compel AT&T to participate in the Company's current debt restructuring and to enjoin Xpedite and PTEK from contacting the Company's creditors and making false statements to the Company's customers and creditors regarding the Company and its financial position. The Company believes that if the sale of the note to PTEK is permitted to occur, the Company's current debt restructuring may be at substantial risk. The Court has ordered limited document discovery and has established a timetable for considering the Company's motion, including a hearing on May 1, 2003 at which oral argument will be made. No assurance can be given as to the outcome of this matter.
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 the Company's favor that the Company 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. The Court has subsequently ordered a settlement conference to be held on April 1, 2003. Although we intend to defend vigorously the matter described above, we cannot assure you that the settlement conference will be successful and, if it is not, that our ultimate liability, if any, in connection with the claim will not exceed our reserves or have a material adverse effect on our results of operations, financial condition or cash flows.
Item 9
Item 9 Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
Not applicable.
Part III
The information required by Items 10 through 13 in this part is omitted pursuant to Instruction G of Form 10-K, and will be included in an amendment to this Form 10-K or in a definitive Proxy Statement, pursuant to Regulation 14A, not later than 120 days after December 31, 2002.
Stephen Ketchum submitted his resignation as a director of EasyLink due to other business commitments, effective March 31, 2003.
Item 14
Item 14 Controls and Procedures
Based on their evaluation, as of a date within 90 days of the filing date of this Form 10-K, EasyLink's Chief Executive Officer and Chief Financial Officer have concluded that EasyLink's disclosure controls and procedures (as defined in Rules 13a-14(c) and 15d-14(c) under the Securities Exchange Act of 1934, as amended) are effective. There have been no significant changes in internal controls or in other factors that could significantly affect these controls subsequent to the date of their evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
Part IV
Item 15.
Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K
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 dated as of December 11, 1999 by and among Mail.com, Inc., Mast Acquisition Corp. and NetMoves Corporation. (Incorporated by reference to Exhibit 2.1 of Mail.com, Inc.'s Current Report on Form 8-K filed December 16, 1999.)
2.2 Form of Company Voting Agreement dated as of December 11, 1999 by and between Mail.com, Inc. and certain directors and officers of NetMoves Corporation. (Incorporated by reference to Exhibit 2.2 of Mail.com, Inc.'s Current Report on Form 8-K filed on December 16, 1999)
2.3 Agreement and Plan of Merger dated as of March 14, 2000 by and among Mail.com, Inc., Asia.com, Inc., eLong.com, Inc. and the Stockholders of eLong.com, Inc. (Incorporated by reference to Exhibit 2.1 of Mail.com, Inc.'s Current Report on Form 8-K filed on March 28, 2000)
2.4 Agreement and Plan of Merger by and among Mail.com, Inc., ML Acquisition Corp., Swift Telecommunications, Inc. ("STI") and George Abi Zeid, as sole shareholder of STI, dated as of January 31, 2001. (Incorporated by reference to Exhibit 2.1 of Mail.com, Inc.'s Current Report on Form 8-K filed February 8, 2001)
2.5 Letter Agreement dated January 31, 2001 between Mail.com, Inc. and George Abi Zeid relating to Telecom International, Inc. (Incorporated by reference to Exhibit 2.2 of Mail.com, Inc.'s Current Report on Form 8-K filed February 8, 2001).
2.6 Letter Agreement dated January 31, 2001 between Mail.com, Inc. and George Abi Zeid relating to the 25% minority interests in Xtreme Global Communications (S) Pte Ltd. and Xtreme Global Communications Sdn Bhd. (Incorporated by reference to Exhibit 2.3 of Mail.com, Inc.'s Current Report on Form 8-K filed February 8, 2001)
2.7 Asset Purchase dated December 14, 2000 between AT&T Corp. and Swift Telecommunications, Inc. (Incorporated by reference to Exhibit 2.1 of Mail.com, Inc.'s Current Report on Form 8-K filed March 9, 2001)
2.8+ Asset Purchase Agreement dated as of March 30, 2001 by and among Mail.com, Inc. and Net2Phone EMail, Inc. (Incorporated by reference to Exhibit 2.8 of EasyLink Services Corporation's Annual Report on Form 10-K for the year ended December 31, 2001)
3.1 Amended and Restated Certificate of Incorporation. (Incorporated by reference to Exhibit 4.1 of Mail.com, Inc.'s Registration Statement on Form S-8 filed June 19, 2000)
3.2 Certificate of Amendment of Amended and Restated Certificate of Incorporation (Incorporated by reference to Exhibit 4.2 of Mail.com, Inc.'s Registration Statement on Form S-8 filed June 19, 2000)
3.3 Certificate of Ownership and Merger. (Incorporated by reference to Exhibit 3.3 of EasyLink Services Corporation's Annual Report on Form 10-K for the year ended December 31, 2001)
3.4 By-Laws. (Incorporated by reference to Exhibit 4.3 of Mail.com, Inc.'s Registration Statement on Form S-8 filed June 19, 2000)
3.5 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)
4.1 Specimen Class A common stock certificate. (Incorporated by reference to Exhibit 10.9 to EasyLink Services Corporation's Annual Report on Form 10-K for the year ended December 31, 2001)
10.1 Employment Agreement between Mail.com, Inc. and Gerald Gorman dated April 1, 1999. (Incorporated by reference to Exhibit 10.1 to the Registrant's Registration Statement on Form S-1 (File No. 333-74353) (the "IPO Registration Statement"))
10.2 Employment Agreement between Mail.com, Inc. and Gary Millin dated April 1, 1999. (Incorporated by reference to Exhibit 10.2 to the IPO Registration Statement)
10.3 Employment Agreement between Mail.com, Inc. and Debra McClister dated April 1, 1999. (Incorporated by reference to Exhibit 10.4 to the IPO Registration Statement)
10.4 Employment Agreement between Mail.com, Inc. and David Ambrosia dated May 19, 1999. (Incorporated by reference to Exhibit 10.6 to the IPO Registration Statement)
10.5 Stock Option Agreement between Mail.com, Inc. and Gary Millin dated December 31, 1996. (Incorporated by reference to Exhibit 10.8 to the IPO Registration Statement)
10.6 Stock Option Agreement between Mail.com, Inc. and Gary Millin dated June 1, 1996. (Incorporated by reference to Exhibit 10.9 to the IPO Registration Statement)
10.7 Stock Option Agreement between Mail.com, Inc. and Gary Millin dated February 1, 1997. (Incorporated by reference to Exhibit 10.10 to the IPO Registration Statement)
10.8 Stock Option Agreement between Mail.com, Inc. and Gerald Gorman dated December 31, 1996. (Incorporated by reference to Exhibit 10.11 to the IPO Registration Statement)
10.9 Stock Option Agreement between Mail.com, Inc. and Gerald Gorman dated June 1, 1996. (Incorporated by reference to Exhibit 10.12 to the IPO Registration Statement)
10.10 1996 Employee Stock Option Plan. (Incorporated by reference to Exhibit 10.14 to the IPO Registration Statement)
10.11 1997 Employee Stock Option Plan. (Incorporated by reference to Exhibit
10.15 to the IPO Registration Statement)
10.12 1998 Employee Stock Option Plan. (Incorporated by reference to Exhibit
10.16 to the IPO Registration Statement)
10.13 1999 Employee Stock Option Plan. (Incorporated by reference to Exhibit
10.17 to the IPO Registration Statement)
10.14 Lease between Mail.com, Inc. and Braun Management and six amendments thereto, the most recent dated May 21, 1998. (Incorporated by reference to Exhibit 10.18 to the IPO Registration Statement)
10.15 Lease between Mail.com, Inc. and Spitfire Marketing Systems Inc. dated August 14, 1998. (Incorporated by reference to Exhibit 10.19 to the IPO Registration Statement)
10.16 Space License Agreement and three amendments thereto between Mail.com, Inc. and Telehouse International Corporation of America, Inc., the most recent amendment dated March 9, 1999. (Incorporated by reference to Exhibit 10.20 to the IPO Registration Statement)
10.17 Lease between Mail.com, Inc. and 55 Madison Associates dated September 15, 1998. (Incorporated by reference to Exhibit 10.21 to the IPO Registration Statement)
10.18 Lease Agreement between Mail.com, Inc. and Leastec Sylvan Credit dated June 20, 1996. (Incorporated by reference to Exhibit 10.22 to the IPO Registration Statement)
10.19 Master Lease Agreement between Mail.com, Inc. and RCC dated July 17, 1998. (Incorporated by reference to Exhibit 10.23 to the IPO Registration Statement)
10.20 Lease Agreement between Mail.com, Inc. and Pacific Atlantic Systems Leasing, dated January 22, 1999. (Incorporated by reference to Exhibit 10.24 to the IPO Registration Statement)
10.21 Class A Preferred Stock Purchase Agreement dated May 27, 1997. (Incorporated by reference to Exhibit 10.25 to the IPO Registration Statement)
10.22 Waiver, Consent and Amendment to Class A Preferred Stock Purchase Agreement and Investors' Rights Agreement, dated July 31, 1998. (Incorporated by reference to Exhibit 10.26 to the IPO Registration Statement)
10.23 Accession Agreement among Mail.com, Inc. and Primus Capital Fund IV Limited Partnership and the Primus Executive Fund Limited Partnership dated August 31, 1998. (Incorporated by reference to Exhibit 10.27 to the IPO Registration Statement)
10.24 Letter Agreement among Gerald Gorman, Primus Capital Fund Limited Partnership and the Primus Executive Fund Limited Partnership dated August 31, 1998. (Incorporated by reference to Exhibit 10.28 to the IPO Registration Statement)
10.25 Class E Preferred Stock Investors' Rights Agreement dated March 10, 1999. (Incorporated by reference to Exhibit 10.29 to the IPO Registration Statement)
10.26 Observer Rights Agreement among the Company, Primus, et. al., and Sycamore Ventures dated August 31, 1998. (Incorporated by reference to Exhibit 10.30 to the IPO Registration Statement)
10.27 Investors' Rights Agreement between NBC Multimedia, Inc., CNET, Inc. and Mail.com, Inc. dated March 1, 1999. (Incorporated by reference to Exhibit 10.31 to the IPO Registration Statement)
10.28 Lycos Term Sheet Agreement dated October 8, 1997 and the amendments thereto. (Incorporated by reference to Exhibit 10.32 to the IPO Registration Statement)
10.29 CNET Warrants dated March 1, 1999. (Incorporated by reference to Exhibit 10.33 to the IPO Registration Statement)
10.30 NBC Multimedia Warrants dated March 1, 1999. (Incorporated by reference to Exhibit 10.34 to the IPO Registration Statement)
10.31 Stock Purchase Agreement between Mail.com, Inc. and CNN Interactive dated July 7, 1998. (Incorporated by reference to Exhibit 10.35 to the IPO Registration Statement)
10.32 Agreement between CNET, Inc., and Mail.com, Inc. dated May 13, 1998. (Incorporated by reference to Exhibit 10.36 to the IPO Registration Statement)
10.33 Letter Agreement between CNET, Inc., Snap Internet Portal Service and Mail.com, Inc. dated as of June 16, 1998. (Incorporated by reference to Exhibit 10.37 to the IPO Registration Statement)
10.34 Letter Agreement between CNET, Inc., Snap Internet Portal Service, NBC Multimedia, Inc. and Mail.com, Inc. dated as of February 8, 1999. (Incorporated by reference to Exhibit 10.38 to the IPO Registration Statement)
10.35 Agreement between NBC Multimedia, Inc. and Mail.com, Inc. dated February 8, 1998. (Incorporated by reference to Exhibit 10.39 to the IPO Registration Statement)
10.36 Equipment Financing Agreement between Pentech Financial Services, Inc. and Mail.com, Inc. dated May 1, 1999. (Incorporated by reference to Exhibit 10.41 to the IPO Registration Statement)
10.37 Equipment Financing Lease--EMC Corporation. (Incorporated by reference to Exhibit 99.1 of Mail.com, Inc.'s Quarterly Report on Form 10-Q for the quarterly period ended June 30, 1999)
10.38 Equipment Financing Lease--Pentech Financial Services, Inc.(Incorporated by reference to Exhibit 99.2 of Mail.com, Inc.'s Quarterly Report on Form 10-Q for the quarterly period ended June 30, 1999)
10.39 Equipment Financing Lease--Pentech Financial Services, Inc. (Incorporated by reference to Exhibit 99.3 of Mail.com, Inc.'s Quarterly Report on Form 10-Q for the quarterly period ended June 30, 1999)
10.40 Investor Rights Agreement dated July 14, 1999 between Mail.com, Inc. and 3Cube, Inc. (Incorporated by reference to Exhibit 99.4 of Mail.com, Inc.'s Quarterly Report on Form 10-Q for the quarterly period ended June 30, 1999)
10.41 Agreement and Plan of Merger dated as of August 20, 1999 among Mail.com, Inc., AG Acquisition Corp., The Allegro Group, Inc. and the Shareholders of The Allegro Group, Inc. (Incorporated by reference to Exhibit 2.1 of Mail.com, Inc.'s Current Report on Form 8-K filed August 23, 1999)
10.42 Sublease Agreement between Mail.com, Inc. and Depository Trust Company. (Incorporated by reference to Exhibit 10.ii(D)(1) of Mail.com, Inc.'s Quarterly Report on Form 10-Q for the quarterly period ended September 30, 1999)
10.43 Data Center Office Lease with AT&T. (Incorporated by reference to Exhibit 10.ii(D)(2) of Mail.com, Inc.'s Quarterly Report on Form 10-Q for the quarterly period ended September 30, 1999)
10.44 Lease Agreement between Mail.com and Forsyth/McArthur Associates. (Incorporated by reference to Exhibit 10.ii(D)(3) of Mail.com, Inc.'s Quarterly Report on Form 10-Q for the quarterly period ended September 30, 1999)
10.45 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)
10.46 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)
10.47 Indenture dated as of January 26, 2000 by and between Mail.com, Inc. and American Stock Transfer & Trust Company, as Trustee. (Incorporated by reference to Exhibit 10.55 of Mail.com, Inc.'s Post-Effective Amendment No. 1 to Form S-4 registration Statement (File No. 333-94807) filed on February 3, 2000).
10.48 Registration Agreement dated as of January 26, 2000 by and between Mail.com, Inc., Salomon Smith Barney Inc., PaineWebber Incorporated, SG Cowen Securities Corporation and Sands Brothers & Co., Ltd. (Incorporated by reference to Exhibit 10.56 of Mail.com, Inc.'s Post-Effective Amendment No. 1 to Form S-4 registration Statement (File No. 333-94807) filed on February 3, 2000).
10.49 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")).
10.50 1996 Stock Option/Stock Issuance Plan (Incorporated by reference to Exhibit 10.4 to the NetMoves Registration Statement).
10.51* Telecommunications Services Agreement, between LDDS WorldCom and NetMoves Corporation, dated December 1, 1996 (Incorporated by reference to Exhibit 10.8 to the NetMoves Corporation's Report on Form 10-Q for the quarter ended March 31, 1997).
10.52* Agreement between MCI Telecommunications Corporation and NetMoves Corporation, effective March 1, 1996 (Incorporated by reference to Exhibit 10.9 to the NetMoves Registration Statement).
10.53 Lease Agreement, dated May 28, 1992, between Metro Four Associates Limited Partnership, Thornall Associates and NetMoves Corporation (the "Metro Four Lease "), as extended and amended prior to May 5, 1997 (Incorporated by reference to Exhibit 10.10 to the NetMoves Registration Statement).
10.54 Amendment to Metro Four Lease, dated May 5, 1997. (Incorporated by reference to Exhibit 10.9 to NetMoves Corporation's Annual Report on Form 10-K for the year ended December 31, 1997)
10.55 Loan and Security Agreement, dated September 26, 1997, between NetMoves Corporation and Silicon Valley Bank. (Incorporated by reference to Exhibit 10.10 to NetMoves Corporation's Annual Report on Form 10-K for the year ended December 31, 1997)
10.56 Letter Agreement, dated November 1, 1994 between Telstra Incorporated and NetMoves Corporation (Incorporated by reference to Exhibit 10.12 to the NetMoves Registration Statement).
10.57 Series B Preferred Stock Warrant between NetMoves Corporation and Comdisco, Inc., dated May 30, 1991 (Incorporated by reference to Exhibit 10.14 to the NetMoves Registration Statement).
10.58 Series B Preferred Stock Warrant between NetMoves Corporation and Comdisco, Inc., dated September 16, 1992 (Incorporated by reference to Exhibit 10.15 to the NetMoves Registration Statement).
10.59 Loan and Security Agreement, dated March 27, 1998, between NetMoves Corporation and Silicon Valley Bank. (Incorporated by reference to Exhibit 10.20 to NetMoves Corporation's Annual Report on Form 10-K for the year ended December 31, 1998)
10.60 Purchase Agreement, dated December 24, 1998, between NetMoves Corporation and the Tail Wind Fund Ltd. (Incorporated by reference to Exhibit 10.1 to NetMoves Corporation's Registration Statement on Form S-3, Registration No. 333-70915)
10.61 Common Stock Warrant between NetMoves Corporation and the Tail Wind Fund Ltd., dated December 28, 1998 (Incorporated by reference to Exhibit 10.2 to NetMoves Corporation's Registration Statement on Form S-3, Registration No. 333-70915)
10.62 Registration Rights Agreement between Mail.com and certain former stockholders of eLong.com, Inc. listed therein, dated as of March 14, 2000. (Incorporated by reference to Exhibit 10.70 to Mail.com's Annual Report on Form 10-K for the year ended December 31, 1999)
10.63 Registration Rights Agreement between Mail.com and STD d/b/a Software Tool & Die, dated as of March 16, 2000. (Incorporated by reference to Exhibit 10.71 to Mail.com's Annual Report on Form 10-K for the year ended December 31, 1999)
10.64 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)
10.65 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)
10.66 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).
10.67 Options Assumed by Mail.com, Inc. pursuant to an Agreement and Plan of Merger dated as of March 14, 2000. (Incorporated by reference to Exhibit 99.1 of Mail.com, Inc.'s Registration Statement on Form S-8 filed June 19, 2000)
10.68 Lease agreement between Mail.com as guarantor and Newcourt Leasing Corporation. (Incorporated by reference to Exhibit 10.ii(D)(1) of Mail.com, Inc.'s Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2000)
10.69 Lease agreement between Mail.com as guarantor and Newcourt Leasing Corporation. (Incorporated by reference to Exhibit 10.ii(D)(2) of Mail.com, Inc.'s Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2000)
10.70 Master Lease agreement between Mail.com and Leasing Technologies International, Inc. (Incorporated by reference to Exhibit 10.ii(D)(3) of Mail.com, Inc.'s Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2000)
10.71 Master Lease agreement between Mail.com and GATX Technology Services Corporation. (Incorporated by reference to Exhibit 10.ii(D)(4) of Mail.com, Inc.'s Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2000)
10.72 Master Lease agreement between Mail.com and Newcourt Leasing Corporation. (Incorporated by reference to Exhibit 10.ii(D)(5) of Mail.com, Inc.'s Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2000)
10.73 Note Purchase Agreement dated as of January 8, 2001, by and among Mail.com, Inc., Mail.com Business Messaging Services, Inc., The Allegro Group, Inc. and the purchasers listed therein. (Incorporated by reference to Exhibit 99.1 of Mail.com, Inc.'s Current Report on Form 8-K filed January 10, 2001)
10.74 Pledge Agreement dated as of January 8, 2001, by and among Mail.com, Inc. and World.com, Inc. as pledgors, the holders of Notes listed therein and The Clark Estates, Inc. as collateral agent on behalf of the holders of Notes. (Incorporated by reference to Exhibit 99.2 of Mail.com, Inc.'s Current Report on Form 8-K filed January 10, 2001)
10.75 Registration Rights Agreement dated as of January 8, 2001, by and among Mail.com, Inc. and the holders of Notes listed therein. (Incorporated by reference to Exhibit 99.3 of Mail.com, Inc.'s Current Report on Form 8-K filed January 10, 2001)
10.76 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)
10.77 Form of Notice To Record Shareholders of Mail.com, Inc. (Incorporated by reference to Exhibit 99.1 of Mail.com, Inc.'s Current Report on Form 8-K filed January 17, 2001)
10.78 Note Exchange Agreement dated as of January 31, 2001, by and among Mail.com, Inc., Mail.com Business Messaging Services, Inc., The Allegro Group, Inc. and the purchasers listed therein. (Incorporated by reference to Exhibit 99.1 of Mail.com, Inc.'s Current Report on Form 8-K filed February 7, 2001)
10.79 Registration Rights Agreement dated as of January 31, 2001, by and among Mail.com, Inc. and the holders of Exchange Notes listed therein. (Incorporated by reference to Exhibit 99.2 of Mail.com, Inc.'s Current Report on Form 8-K filed February 7, 2001)
10.80 Amended and Restated Promissory Note dated January 31, 2001 in the original principal amount of $35 million issued by Mail.com, Inc. and accepted by AT&T Corp. (Incorporated by reference to Exhibit 99.1 ofMail.com, Inc.'s Current Report on Form 8-K filed February 8, 2001)
10.81 Promissory Note dated January 31, 2001 in the original principal amount of $14 million issued by Swift Telecommunications, Inc. in favor of Mail.com, Inc. (Incorporated by reference to Exhibit 99.3 of Mail.com, Inc.'s Current Report on Form 8-K filed February 8, 2001)
10.82 Note Exchange Agreement dated as of February 8, 2001, by and among Mail.com, Inc., Mail.com Business Messaging Services, Inc., The Allegro Group, Inc. and the purchasers listed therein. (Incorporated by reference to Exhibit 99.1 of Mail.com, Inc.'s Current Report on Form 8-K filed February 13, 2001)
10.83 Registration Rights Agreement dated as of February 8, 2001, by and among Mail.com, Inc. and the holders of Exchange Notes listed therein. (Incorporated by reference to Exhibit 99.2 of Mail.com, Inc.'s Current Report on Form 8-K filed February 13, 2001)
10.84 Note Exchange Agreement dated as of February 14, 2001, by and among Mail.com, Inc., Mail.com Business Messaging Services, Inc., The Allegro Group, Inc. and the purchasers listed therein. (Incorporated by reference to Exhibit 99.1 of Mail.com, Inc.'s Current Report on Form 8-K filed February 26, 2001)
10.85 Registration Rights Agreement dated as of February 14, 2001, by and among Mail.com, Inc. and the holders of Exchange Notes listed therein. (Incorporated by reference to Exhibit 99.2 of Mail.com, Inc.'s Current Report on Form 8-K filed February 26, 2001)
10.86 Bridge Funding and Amendment Agreement by and among India.com, Inc., Mail.com, Inc. and the holders of India.com, Inc. Preferred Stock signatories thereto, together with the Forms of Bridge Notes and Warrants issuable pursuant thereto attached as Exhibits thereto. (Incorporated by reference to Exhibit 99.3 of Mail.com, Inc.'s Current Report on Form 8-K filed February 26, 2001)
10.87 Amendment No. 1 to Pledge Agreement by and among India.com, Inc., Mail.com, Inc., the collateral agent thereunder and the other parties thereto. (Incorporated by reference to Exhibit 99.4 of Mail.com, Inc.'s Current Report on Form 8-K filed February 26, 2001)
10.88 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)
10.89 Promissory Note in the original principal amount of $9,188,235 in favor of George Abi Zeid. (Incorporated by reference to Exhibit 99.1 of Mail.com, Inc.'s Current Report on Form 8-K filed March 9, 2001)
10.90 Pledge Agreement between Mail.com, Inc. and AT&T Corp. dated January 31, 2001 securing promissory note in original principal amount of $35 million. (Incorporated by reference to Exhibit 99.2 of Mail.com, Inc.'s Current Report on Form 8-K filed March 9, 2001)
10.91 Pledge Agreement between Swift Telecommunications, Inc. and AT&T Corp. dated January 31, 2001 securing promissory note in original principal amount of $35 million. (Incorporated by reference to Exhibit 99.3 of Mail.com, Inc.'s Current Report on Form 8-K filed March 9, 2001)
10.92 Security Agreement between Swift Telecommunications, Inc. and AT&T Corp. dated January 31, 2001 securing promissory note in original principal amount of $35 million. (Incorporated by reference to Exhibit 99.4 of Mail.com, Inc.'s Current Report on Form 8-K filed March 9, 2001)
10.93 Security Agreement between Swift EasyLink Co., Inc. and AT&T Corp. dated January 31, 2001 securing promissory note in original principal amount of $35 million. (Incorporated by reference to Exhibit 99.5 of Mail.com, Inc.'s Current Report on Form 8-K filed March 9, 2001)
10.94 Note Purchase Agreement dated as of March 13, 2001, by and among Mail.com, Inc., Mail.com Business Messaging Services, Inc., The Allegro Group, Inc. and the purchasers listed therein. (Incorporated by reference to Exhibit 99.1 of Mail.com, Inc.'s Current Report on Form 8-K filed March 26, 2001)
10.95 Registration Rights Agreement dated as of March 13, 2001, by and among Mail.com, Inc. and the holders of Notes listed therein. (Incorporated by reference to Exhibit 99.2 of Mail.com, Inc.'s Current Report on Form 8-K filed March 26, 2001)
10.96 Common Stock Purchase Agreement dated as of March 13, 2001, by and between Mail.com, Inc., and the purchaser listed therein. (Incorporated by reference to Exhibit 99.3 of Mail.com, Inc.'s Current Report on Form 8-K filed March 26, 2001)
10.97 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)
10.98* Transition Services Agreement dated January 31, 2001 between AT&T Corp. and Swift Telecommunications, Inc. (Incorporated by reference to Exhibit 2.2 of Mail.com, Inc.'s Current Report on Form 8-K filed March 9, 2001)
10.99* Master Carrier Agreement dated January 31, 2001 between AT&T Corp. and Swift Telecommunications, Inc. (Incorporated by reference to Exhibit 2.3 of Mail.com, Inc.'s Current Report on Form 8-K filed March 9, 2001)
10.100 Shareholding Interest Transfer Agreement by and among eLong, Inc., eLong.com (Beijing), Ltd., Asia.com, Inc., and Easylink Services Corporation (Incorporated by reference to Exhibit 2 of EasyLink Service Corporation's Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2001)
10.101 Exchange Agreement Amendment dated as of July 10, 2001, by and among EasyLink Services Corporation and the investors signatory thereto. (Incorporated by reference to Exhibit 99.1 of EasyLink Services Corporation's Current Report on Form 8-K filed July 24, 2001)
10.102 Modification Agreement, effective as of June 1, 2001, by and among GATX Technology Services Corporation and EasyLink Services Corporation. (Incorporated by reference to Exhibit 99.1 of EasyLink Services Corporation's Current Report on Form 8-K filed September 28, 2001)
10.103 Modification Agreement, effective as of June 1, 2001, by and between GATX Technology Services Corporation, as successor in interest to Pacific Atlantic Systems Leasing, and EasyLink Services Corporation. (Incorporated by reference to Exhibit 99.2 of EasyLink Services Corporation's Current Report on Form 8-K filed September 28, 2001)
10.104 Modification Agreement, effective as of June 1, 2001, between EasyLink Services Corporation, as successor to Mail.com, Inc., and Associates Leasing, Inc. (Incorporated by reference to Exhibit 99.3 of EasyLink Services Corporation's Current Report on Form 8-K filed September 28, 2001)
10.105 Modification Agreement, effective as of June 1, 2001, by and among Forsythe McArthur Associates, Inc. and EasyLink Services Corporation. (Incorporated by reference to Exhibit 99.4 of EasyLink Services Corporation's Current Report on Form 8-K filed September 28, 2001)
10.106 Modification Agreement, effective as of June 1, 2001, by and among Pentech Financial Services, Inc. and EasyLink Services Corporation. (Incorporated by reference to Exhibit 99.5 of EasyLink Services Corporation's Current Report on Form 8-K filed September 28, 2001)
10.107 Modification Agreement, effective as of June 1, 2001, by and among Phoenix Leasing Incorporated, EasyLink Services USA, Inc. and EasyLink Services Corporation. (Incorporated by reference to Exhibit 99.6 of EasyLink Services Corporation's Current Report on Form 8-K filed September 28, 2001)
10.108 Modification Agreement, effective as of June 1, 2001, by and among MicroTech Leasing Corp. and EasyLink Services Corporation. (Incorporated by reference to Exhibit 99.7 of EasyLink Services Corporation's Current Report on Form 8-K filed September 28, 2001)
10.109 Letter Agreement, effective as of June 1, 2001, by and between AT&T Corp. and EasyLink Services Corporation. (Incorporated by reference to Exhibit 99.8 of EasyLink Services Corporation's Current Report on Form 8-K filed September 28, 2001)
10.110 Letter Agreement, effective as of June 1, 2001, by and between George Abi Zeid and EasyLink Services Corporation. (Incorporated by reference to Exhibit 99.9 of EasyLink Services Corporation's Current Report on Form 8-K filed September 28, 2001)
10.111 Letter Agreement, dated September 12, 2001, by and between Transamerica Business Credit Corporation and EasyLink Services Corporation. (Incorporated by reference to Exhibit 99.10 of EasyLink Services Corporation's Current Report on Form 8-K filed September 28, 2001)
10.112 Letter Agreement, dated as of June 1, 2001, by and between Leasing Technologies International, Inc. and EasyLink Services Corporation. (Incorporated by reference to Exhibit 99.11 of EasyLink Services Corporation's Current Report on Form 8-K filed September 28, 2001)
10.113 Modification Agreement, effective as of June 1, 2001, by and among Fleet Business Credit, LLC, formerly Fleet Business Credit Corporation and EasyLink Services Corporation., formerly Mail.com, Inc. (Incorporated by reference to Exhibit 99.12 of EasyLink Services Corporation's Current Report on Form 8-K filed September 28, 2001)
10.114 Modification agreement dated as June 1, 2001 by and between AT&T Corp. and EasyLink Services Corporation. (Incorporated by reference to Exhibit 99(1) of EasyLink Service Corporation's Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2001)
10.115 Modification agreement dated as June 1, 2001 by and among Leasing Technologies International, Inc. and EasyLink Services Corporation. (Incorporated by reference to Exhibit 99(2) of EasyLink Service Corporation's Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2001)
10.116 Press Release dated January 15, 2002. (Incorporated by reference to Exhibit 99.1 of EasyLink Services Corporation's Current Report on Form 8-K filed January 15, 2002)
10.117 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)
10.118 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)
10.119 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)
21** Subsidiaries of EasyLink Services Corporation
23** Consent of KPMG LLP.
* Confidential treatment granted.
+ Disclosure schedules and other attachments are omitted, but will be furnished supplementally to the Commission upon request.
Financial Statement Schedules
None
Reports on Form 8-K-
The Corporation filed no reports on Form 8-K during the quarter ended December 31, 2002.
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, 2003.
EasyLink Services Corporation (Registrant)
By /s/ THOMAS MURAWSKI ------------------------------------------------ (Thomas Murwaski, Chief Executive Officer and President)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated on March 31, 2003.
/s/ GERALD GORMAN Chairman, Director - ------------------------ (Gerald Gorman)
/s/ THOMAS MURAWSKI Chief Executive Officer and President, Director - ------------------------ (Principal Executive Officer) (Thomas Murawski)
/s/ GEORGE ABI ZEID President, International Operations, Director - ------------------------ (George Abi Zeid)
/s/ DEBRA L. MCCLISTER Executive Vice President and Chief Financial - ------------------------ Officer (Debra L. McClister) (Principal Accounting and Financial Officer)
/s/ DAVID AMBROSIA Executive Vice President, General Counsel - ------------------------ and Secretary (David Ambrosia)
/s/ STEPHEN M. DUFF Director - ------------------------ (Stephen M. Duff)
CERTIFICATION
I, Thomas Murawski, certify that:
(1) I have reviewed this annual report on Form 10-K of EasyLink Services Corporation ("Easylink");
(2) based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary in order to make the statements made, in light of the circumstances under which such statements were made, not misleading;
(3) based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition and results of operations of EasyLink as of, and for, the periods presented in this annual report;
(4) EasyLink's other certifying officer and I:
(A) are responsible for establishing and maintaining internal controls;
(B) have designed such internal controls to ensure that material information relating to EasyLink and its consolidated subsidiaries is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;
(C) have evaluated the effectiveness of EasyLink's internal controls as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and
(D) have presented in this annual report our conclusions about the effectiveness of our internal controls based on our evaluation as of the Evaluation Date;
(5) EasyLink's other certifying officer and I have disclosed to EasyLink's auditors and audit committee of EasyLink's Board of Directors (or persons fulfilling the equivalent function):
(A) all significant deficiencies in the design or operation of internal controls which could adversely affect EasyLink's ability to record, process, summarize and report financial data and have identified for EasyLink's auditors any material weaknesses in internal controls; and
(B) any fraud, whether or not material, that involves management or other employees who have a significant role in EasyLink's internal controls; and
(6) EasyLink's other certifying officer and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
Date: March 31, 2003 /s/ THOMAS MURAWSKI ------------------------------------- Thomas Murawski Chief Executive Officer and President
CERTIFICATION
I, Debra McClister, certify that:
(1) I have reviewed this annual report on Form 10-K of EasyLink Services Corporation ("Easylink");
(2) based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary in order to make the statements made, in light of the circumstances under which such statements were made, not misleading;
(3) based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition and results of operations of EasyLink as of, and for, the periods presented in this annual report;
(4) EasyLink's other certifying officer and I:
(A) are responsible for establishing and maintaining internal controls;
(B) have designed such internal controls to ensure that material information relating to EasyLink and its consolidated subsidiaries is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;
(C) have evaluated the effectiveness of EasyLink's internal controls as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and
(D) have presented in this annual report our conclusions about the effectiveness of our internal controls based on our evaluation as of the Evaluation Date;
(5) EasyLink's other certifying officer and I have disclosed to EasyLink's auditors and audit committee of EasyLink's Board of Directors (or persons fulfilling the equivalent function):
(A) all significant deficiencies in the design or operation of internal controls which could adversely affect EasyLink's ability to record, process, summarize and report financial data and have identified for EasyLink's auditors any material weaknesses in internal controls; and
(B) any fraud, whether or not material, that involves management or other employees who have a significant role in EasyLink's internal controls; and
(6) EasyLink's other certifying officer and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
Date: March 31, 2003 /s/ DEBRA McCLISTER --------------------------- Debra McClister Executive Vice President and Chief Financial Officer