SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K/A
Amendment No. 1 to
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported)
FEBRUARY 23, 2001
EASYLINK SERVICES CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 000-26371 13-3787073
(State or other jurisdiction (Commission File Number) (I.R.S. Employer
of incorporation) Identification No.)
399 Thornall Street, Edison, NJ 08837
(Address of principal executive offices)
Registrant's telephone number, including area code (732) 906-2000
Mail.com, Inc.
11 Broadway, New York, NY 10004
Former Name or Former Address, if Changed Since Last Report
The undersigned registrant hereby amends the following items, financial
statements, exhibits or other portions of the Current Report on Form 8-K,
originally filed by the registrant with the Securities and Exchange Commission
on February 23, 2001, as set forth in the pages attached hereto:
ITEM 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND EXHIBITS
(a) Financial Statements of Businesses Acquired
TABLE OF CONTENTS
Swift Telecommunications, Inc.
Independent Auditors Report F-1
Combined Balance Sheet as of December 31, 2000 F-2
Combined Statement of Operations for the Year Ended December 31, 2000 F-3
Combined Statement of Cash Flows for the Year Ended December 31, 2000 F-4
Combined Statement of Changes in Stockholder's Deficit and Comprehensive
Loss for the Year Ended December 31, 2000 F-5
Notes to Combined Financial Statements F-6
AT&T EasyLink Services (A fully integrated business of AT&T Corp.)
Report of Independent Accountants F-14
Statement of Net Assets as of December 31, 2000 F-15
Statement of Income and Changes in Net Assets for the Year Ended December 31, 2000 F-16
Statement of Cash Flows for the Year Ended December 31, 2000 F-17
Notes to Financial Statements F-18
Independent Auditors Report
To the Management and Shareholder of Swift Telecommunications, Inc.
We have audited the accompanying combined balance sheet of Swift
Telecommunications, Inc. and Swift Comtext Ltd as of December 31, 2000, and the
related combined statements of operations, stockholder's deficit and
comprehensive loss, and cash flows for year ended December 31, 2000. These
combined financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these combined
financial statements based on our audit.
We conducted our audit 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 from 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 audit provides a
reasonable basis for our opinion.
In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the financial position of Swift
Telecommunications, Inc. and Swift Comtext Ltd as of December 31, 2000, and the
results of their operations and their cash flows for the year ended December 31,
2000 in conformity with accounting principles generally accepted in the United
States of America on the basis of presentation as described in Note 1 to the
combined financial statements.
/s/ KPMG
Chartered Accountants
Registered Auditors
London, United Kingdom
May 8, 2001
F-1
Swift Telecommunications, Inc.
Combined balance sheet
(in thousands)
December 31, 2000
-----------------
Assets
Cash $ 30
Accounts receivable, net of allowance for doubtful accounts of $278 2,234
Due from related party 377
Prepaid expenses and other current assets 531
-------
Total current assets 3,174
Machinery and equipment, net 1,794
Investments 1,415
Purchased intangibles, net 793
-------
Total assets $ 7,174
=======
Liabilities
Accounts payable $ 2,320
Accrued expenses 2,960
Other current liabilities 224
Note payable 1,400
Advances due to shareholder 1,009
Income taxes payable 135
-------
Total current liabilities $ 8,049
Stockholder's deficit
Common stock, $0.01 par value, 200 shares authorised, issued
and outstanding at December 31, 2000 -
Additional paid in capital -
Accumulated other comprehensive income 4
Accumulated deficit (878)
-------
Total stockholder's deficit $ (874)
-------
Total liabilities and stockholder's deficit $ 7,174
=======
See accompanying notes to combined financial statements
F-2
Swift Telecommunications, Inc.
Combined statement of operations
(in thousands)
For the year ended
December 31, 2000
-----------------
Revenues $ 4,230
Operating expenses:
Cost of revenues (1,927)
General & administration (2,995)
Amortization of purchased intangibles (48)
--------
Total operating expenses 4,970
--------
Loss from operations (740)
Interest expense (3)
--------
Loss before provision for income taxes $ (743)
Provision for income taxes (135)
--------
Net loss $ (878)
========
See accompanying notes to combined financial statements
F-3
Swift Telecommunications, Inc.
Combined statement of cash flows
(in thousands)
For the year ended
December 31, 2000
-----------------
Net loss $ (878)
Adjustments to reconcile net loss to net cash from operating activities:
Provisions for doubtful debts 349
Depreciation and amortization 126
Changes in operating assets and liabilities:
Accounts receivable (2,512)
Prepaid expenses and other current assets (526)
Due from related party (377)
Accounts payable, accrued expenses and other current liabilities 4,360
-------
Net cash provided by operating activities 542
-------
Cash flows from investing activities:
Purchase of investments and business combinations (1,485)
Capital expenditures, net (36)
-------
Net cash used in investing activities (1,521)
-------
Cash flows from financial activities:
Advance from stockholder 1,009
-------
Net cash provided by financing activities 1,009
-------
Effect of foreign exchange rate:
Net (decrease)/increase in cash 30
Cash at beginning of the year -
-------
Cash at end of the year $ 30
=======
See accompanying notes to combined financial statements
F-4
Swift Telecommunications, Inc.
Swift Telecommunications Inc
(in thousands)
Combined statements of changes in stockholder's deficit and comprehensive loss
for the year ended December 31, 2000
Accumulated
Additional other
common stock paid in comprehensive Accumulated
Shares Amounts capital loss deficit Total
------------ ------- ---------- ------------- ----------- -----
Balance at January 1, 2000 (unaudited) 200 $ - $ - $ - $ - $ -
Comprehensive loss:
Net loss (878) (878)
Translation adjustments 4 - 4
----- ----- ----- ----- ------ ------
Total comprehensive loss - - - - - (874)
----- ----- ----- ----- ------ ------
Balance at December 31, 2000 200 $ - $ - $ 4 $(878) $(874)
===== ===== ===== ===== ====== ======
See notes to combined financial statements.
F-5
Swift Telecommunications, Inc.
Notes to Combined Financial Statements
Year ended December 31, 2000
(in thousands)
1 Summary of Operations and Significant Accounting Policies
Summary of operations
Swift Telecommunications, Inc (the "Company" or "Swift"), founded in 1999, is a
telex, fax, data and messaging services company with sales offices and switching
facilities in New York, United Kingdom, Spain, Singapore, Malaysia and France.
The Company was formed in 1999, however, the Company formally commenced
implementation of its business plan on August 1, 2000.
Basis of presentation
In January 2001 Swift disposed of its Italian operations, GN Comtext Srl
("Comtext Srl"), prior to the Company being acquired by Easylink. Since the
continuing businesses acquired by Easylink are limited to Swift and its wholly
owned subsidiary in the United Kingdom, Swift Comtext Ltd. ("Comtext Ltd"), the
accompanying combined financial statements are limited to include the combined
financial position and results of operations of the Company and Comtext Ltd. The
Italian operations, Comtext Srl have been excluded from the combined financial
statements and are presented in a manner similar to an investment accounted for
under the cost method and are included in Investments on the combined balance
sheet as of December 31, 2000.
All significant intercompany balances and transactions have been eliminated in
combination.
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. The significant estimates and
assumptions embedded within the combined financial statements relate to the
allowance for doubtful accounts, the fair value of assets acquired in business
combinations, and the estimated useful lives of assets, tangible and intangible
assets. Actual results could differ from those estimates.
Machinery and equipment
Machinery 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. 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.
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
using the cost method. Such investments are stated at the lower of cost or
market value. 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.
F-6
Swift Telecommunications, Inc.
Notes to Combined Financial Statements
Year ended December 31, 2000
(in thousands)
1 Accounting policies (continued)
Purchased intangibles
Purchased intangible assets are stated net of accumulated amortization.
Purchased intangibles are being amortized on a straight-line basis over their
expected period of benefit ranging from three to ten years.
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.
Revenue recognition
The Company generates revenues in the business market by providing customers
with Fax and Telex services. Revenues are recognized as the services are
performed, typically based on a customer's specific usage, assuming no
significant obligation remains and collection of the resulting receivable is
probable. The Company's services are generally rendered pursuant to short term
arrangements and the Company provides for allowances based on historical
experience and specific customer circumstances.
The Company also enters into supplier arrangements providing bulk 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 resulting receivable is probable.
Financial instruments and concentration of credit risk
Financial instruments that potentially subject the Company to significant
concentrations of credit risk consist of cash and accounts receivable. At
December 31, 2000 the fair value of cash, accounts receivable, note payable and
advances due from the shareholder approximated their financial statement
carrying amount because of the short-term maturity of these instruments.
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.
Accounting for impairment of long-lived assets
The Company assesses the need to record impairment losses on long-lived assets,
including intangible assets, used in operations when indicators of impairment
are present. 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, the Company re-evaluates 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 a permanent impairment of the
value of long-lived assets based upon events or circumstances that have occurred
since acquisition. The impairment policy is consistently applied in evaluating
impairment for each of the Company's wholly owned subsidiaries and investments.
It is reasonably possible that the impairment factors evaluated by management
will change in subsequent periods, given that the Company operates in a volatile
business environment. This could result in material impairment charges in the
future.
F-7
Swift Telecommunications, Inc.
Notes to Combined Financial Statements
Year ended December 31, 2000
(in thousands)
1 Accounting policies (continued)
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
stockholder's deficit. Net gains and losses from foreign currency transactions
are included in the 2000 combined statement of operations and were not
significant.
Segment reporting
Although the Company offers, largely through its acquired businesses, a variety
of services spread across numerous multinational locations, management does not
manage its operations by product offerings or geography, but instead views the
Company as one operating segment when making decisions, with a single operating
decision maker, the Managing Director.
Recent accounting pronouncements
In December 1999, the SEC issued Staff Accounting Bulletin No. 101, "Revenue
Recognition In Financial Statements" ("SAB No. 101"), which summarizes certain
of the SEC staff's views in applying generally accepted accounting principles to
revenue recognition in financial statements. The Company has adopted the
accounting provisions of SAB No. 101 as of April 1, 2000 and it did not have a
significant impact on the Company's financial statements.
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133
establishes accounting and reporting standards for derivative instruments,
including derivative instruments embedded in other contracts, and for hedging
activities. During June 1999, SFAS No. 137 was issued which delayed the
effective date of SFAS No. 133. SFAS No. 137 is effective for all fiscal
quarters of fiscal years beginning after June 15, 2000. The Company does not
expect this statement to affect the Company, as it does not have any derivative
instruments or hedging activities.
2 Acquisitions
Acquisition of certain trade assets from GN Comtext Limited and shares of GN
Comtext Srl
On August 1, 2000, Swift acquired assets from GN Comtext Ltd, a United Kingdom
based provider of messaging services. The acquisition was accounted for using
the purchase method of accounting and accordingly, the purchase price was
allocated to the tangible and identified intangible assets acquired on the basis
of their respective fair values on the date of acquisition. The results of
operations and the estimated fair value of the assets acquired and liabilities
assumed are included in the Company's combined financial statements from the
date of acquisition. The fair value of the intangible assets was determined
based upon a combination of methods, including an income approach for the
customer list, and the replacement cost approach for the fair value of the
assembled workforce.
The total transaction consideration of $1.4 million included other acquisition
related expenses consisting primarily of payments for legal and financial
advisory services. Of the total purchase price, approximately $500 was allocated
to net tangible assets and the remainder, totalling $900 was allocated to
identified intangible assets, including the customer list and assembled
workforce. The fair values of acquired intangible assets were capitalized and
are being amortized over their estimated useful lives of three and ten years.
Related amortization for the period ended December 31, 2000 totalled $48.
F-8
Swift Telecommunications, Inc.
Notes to Combined Financial Statements
Year ended December 31, 2000
(in thousands)
The acquisition is summarized as follows:
2 Acquisitions (continued)
Fair value of tangible assets acquired $4,000
Fair value of identified intangible assets acquired 6,000
--------
10,000
========
Purchase price including acquisition of costs of $50 1,400
Total transaction consideration 1,400
========
Since the sum of the fair value of identifiable assets acquired exceeded the
costs to acquire such assets, and no current assets were acquired, the values
assignable were reduced proportionately to determine the assigned value to the
individual assets acquired, no negative goodwill was recorded.
On August 1, 2000, Swift acquired all of the issued and outstanding common stock
of GN Comtext Srl, a messaging services company based in Italy for $1.4 million.
In connection with these transactions the company paid $1.4 million of cash and
also issued a $1.4 million non-interest bearing note payable in seven equal
quarterly installments of $200 commencing December 2000.
Swift and the former owners of the acquired businesses have agreed to provide
each other certain transition services, primarily customer support and
administrative services, generally for a period of six months following the
consummation of the transaction. For this, the parties are being reimbursed at
an amount which approximates the fair value of the underlying services.
In addition, Swift has agreed to provide messaging services to the former owners
of the acquired business pursuant to a contract with commercial terms generally
consistent with those of unrelated third parties.
TMI
During November, 2000, Swift acquired the telex and fax customer base from TMI,
a subsidiary of Telecom Italia for $15.
3 Machinery and equipment
Machinery and equipment consists of the following at December 31, 2000:
Computer equipment and machinery $ 592
Purchased software 1,280
-------
Total machinery and equipment 1,872
Less: Accumulated depreciation (78)
-------
Machinery and equipment, net $ 1,794
-------
Depreciation totalled $78 for the year ended December 31, 2000
F-9
Swift Telecommunications, Inc.
Notes to Combined Financial Statements
Year ended December 31, 2000
(in thousands)
4 Accrued expenses consist of the following, in thousands:
December 31, 2000
-----------------
Accrued purchases $ 1,400
Payroll and related costs 72
Carrier charges 924
Accrued charges for transition services 370
Agent commissions 111
Other 83
-------
Total $ 2,960
=======
5 Leases
Future minimum lease payments under non-cancellable operating leases (with
initial or remaining lease terms in excess of one year) as of December 31, 2000
are as follows, in thousands:
Total minimum
lease payments
----------------
2001 $ 397
2002 397
2003 397
2004 397
2005 374
2006 and later 4,114
-------
Total minimum lease payments $6,076
=======
6 Income tax
The provision for income taxes is comprised of the following:
For the
Year Ended
December 31, 2000
-----------------
Current:
U.S. Federal and State $135
Foreign --
----
135
----
Deferred:
U.S. Federal and State --
Foreign --
----
--
----
$135
====
The following is a reconciliation between the statutory Federal income tax rate
and the effective rate:
For the
Year Ended
December 31, 2000
-----------------
Tax at U.S. Federal Statutory rate $(250)
Change in valuation allowance 206
Non deductible expenses 110
Tax on foreign loss under U.S. tax rate 25
State income tax, net of Federal benefit 20
Other 26
Meals and entertainment --
-----
Provision for income taxes $ 135
=====
The Company's deferred tax assets and liabilities were as follows:
As of
December 31, 2000
-----------------
Deferred tax assets:
Allowance for doubtful accounts $ 52
Trading loss carry forwards 145
Capitalized costs 45
Less valuation allowance (206)
-----
86
-----
Deferred tax liabilities:
Depreciation (86)
-----
(86)
-----
Total Net deferred tax assets
(liabilities) $ --
=====
At December 31, 2000, the Company has available estimated foreign trading loss
carry forwards which are available to reduce future taxable income subject to
varying expiration rules. A valuation allowance has been established due to the
uncertainty as to whether the Company will generate sufficient taxable earnings
to utilize the available net operating loss carry forwards. In addition, the
Company has provided a valuation allowance regarding net deferred tax assets
since management has determined that it is not "more likely than not" that such
ammounts will be realized.
F-10
Swift Telecommunications, Inc.
Notes to Combined Financial Statements
Year ended December 31, 2000
(in thousands)
7 Valuation and qualifying accounts
Additions
Balance at charged to Balance at
December 31, costs & Deductions/ December 31,
1999 expenses write-offs 2000
------------ ---------- ------------ ------------
For the year ended December 31, 2000 $ - $ 349 $ - $ 349
=========== ========== ========== ==========
8 Related party transaction
During the year ended December 31, 2000, the Company recouped certain
telecommunications and other charges from Swift Comtext Srl and such amounts are
applied against third party costs in the combined statement of operations.
Amounts receivable totalling $377 are presented as Due from related party on the
combined balance sheet at December 31, 2000.
F-11
Swift Telecommunications, Inc.
Notes to Combined Financial Statements
December 31, 2000
(in thousands)
9 Subsequent events - unaudited
In January 2001, the Company acquired a 75% majority voting control of Xpedite
Systems Inc. (m) SDN BHD, and The Xtreme Global Communications SDN BHD, for $250
and $266 in cash, respectively. The business combinations will be accounted for
using the purchase method and the aforementioned transactions may result in the
recognition of additional tangible and intangible assets and related
depreciation and amortization from the date of consummation.
Sale of Italy
On January 31, 2001 the Company sold substantially all of the assets and
liabilities of Comtext Srl to Expedite Communications Srl and received $2.3
million cash and a note of approximately $2.5 million.
The Company will consider proceeds from the sale of the assets, offset by the
net book value of its investment at various disposition expenses in considering
any gain which may result from this transaction.
On January 31, 2001, Mail.com and Swift entered into an Agreement and Plan of
Merger ("Merger Agreement"). On February 23, 2001, the Company was acquired by
Mail.com. In January 2001, Swift acquired from AT&T Corp. its EasyLink Services
business ("EasyLink Services").
Swift together with its newly acquired EasyLink Services business is a global
provider of messaging services such as electronic data interchange, e-mail, fax
and telex.
At the closing of the acquisition by Swift of the EasyLink Services business
from AT&T, Mail.com advanced $14 million to Swift 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 Swift, Mail.com assumed a
$35 million note issued by Swift to AT&T. The $35 million note will be secured
by the assets of Swift, including the EasyLink Services business, and the shares
of Mail.com Class A common stock to be issued to the sole shareholder of Swift
in the Merger. The note is receivable in equal monthly instalments over four
years and bears interest at a rate of 10% per annum. The note is subject to
mandatory prepayment upon the sale of specified assets of Swift, including the
EasyLink Services business, and in certain other events. The note also contains
certain customary covenants and events of default, including limitations on the
ability of Mail.com to incur additional indebtedness and to incur additional
liens on the Swift and EasyLink assets.
Upon the closing of the acquisition of Swift, Mail.com paid to the sole
shareholder of Swift approximately $33 million consisting of $835 in cash and an
unsecured note for approximately $9.2 million and approximately 19 million
shares of Mail.com Class A common stock valued at approximately $23 million as
the purchase price for the acquisition of Swift. Mail.com will also pay
additional consideration to the sole shareholder of Swift equal to the amount of
the net proceeds, after satisfaction of certain liabilities of Swift and its
subsidiaries, from the sale or liquidation of the assets of one of Swift's
subsidiaries, Comtext Srl. Mail.com also reimbursed the sole shareholder of
Swift for a $1.5 million advance made to Swift, the proceeds of which were used
to fund the balance of the cash portion of the purchase price for Swift's
acquisition of the EasyLink Services business and certain other obligations to
AT&T. The $9.2 million note will be receivable in four equal semi-annual
instalments 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 will be
non-interest bearing unless Mail.com fails to make a required payment within 30
days after the due date therefore. Thereafter, the note will bear interest at
the rate of 10% per annum. The note also contains certain customary events of
default.
As part of the transaction with Swift, Mail.com has also agreed to acquire
Telecom International, Inc. (which is an affiliate of Swift and conducts
business under the name "AlphaTel") and the 25% minority interests in the
aforementioned Swift subsidiaries for $165 in cash, promissory notes in the
aggregate principal amount of approximately $1.8 million and 3.7 million shares
of Mail.com Class A common stock. These additional transactions are subject to
execution of definitive documentation, receipt of regulatory approvals and other
customary conditions.
The Company will allocate a portion of the purchase price to the fair market
value of the acquired assets and liabilities assumed of the EasyLink Services
businesses. The excess of the purchase price over the fair market value of the
acquired assets and liabilities assumed will be allocated to goodwill and other
intangible assets. Goodwill and other intangible assets are expected to be
amortized over a period of three to five years, the expected estimated period of
benefit. The purchase price allocation is dependant on 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 potential identification
of certain intangible assets such as customer lists, etc.
F-12
Swift Telecommunications, Inc.
Notes to Combined Financial Statements
December 31, 2000
(in thousands)
9 Subsequent events - unaudited (continued)
Additionally, upon the closing of the Swift acquisition, the President and sole
shareholder of Swift, joined Mail.com as President of International Operations
and became a member of Mail.com's Board of Directors.
F-13
Report of Independent Accountants
To the Management of AT&T EasyLink Services
In our opinion, the accompanying statement of combined net assets and the
related combined statements of income and changes in net assets and cash flows
present fairly, in all material respects, the financial position of AT&T
EasyLink Services (the "Company") at December 31, 2000, and the results of its
operations, and its combined cash flows for the year ended December 31, 2000, in
conformity with generally accepted accounting principles. These combined
financial statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audit. We conducted our audit of these combined financial statements in
accordance with generally accepted auditing standards, which 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, and evaluating the
overall financial statement presentation. We believe that our audit provides a
reasonable basis for the opinion expressed above.
The Company is a fully integrated business of AT&T Corp. ("AT&T"); consequently,
as indicated in Note 2, these combined financial statements have been derived
from the consolidated financial statements and accounting records of AT&T, and
reflect significant assumptions and allocations. Moreover, as indicated in Note
1, the Company relies on AT&T and its other business units for the provisioning
of telecommunications services, and administrative, management and other
services. The financial position, results of operations and cash flows of the
Company could differ from those that would have resulted had the Company
operated autonomously or as an entity independent from AT&T.
As described in Note 1 to the combined financial statements, the Company was
purchased by Swift Telecommunications, Inc. ("STI") on January 31, 2001. On
February 23, 2001, Mail.com, Inc. ("Mail.com"), acquired STI. On April 2, 2001,
Mail.com formally changed its corporate name and identity to EasyLink Services
Corporation.
/s/ PricewaterhouseCoopers LLP
Florham Park, New Jersey
May 4, 2001
F-14
AT&T EasyLink Services
(A fully integrated business of AT&T Corp.)
Combined Statement of Net Assets
As of December 31, 2000
(In thousands of dollars)
--------------------------------------------------------------------------------
Assets
Current assets
Accounts receivable (net of allowance for uncollectibles of $6,244) $ 16,450
Deferred taxes 2,562
-------------
Total current assets 19,012
Plant and equipment, net 13,368
Capitalized software, net 2,321
-------------
Total assets $ 34,701
=============
Liabilities
Current liabilities
Accounts payable $ 7,276
Agent commissions 595
Accrued expenses 1,309
Accrued payroll and benefits 2,199
-------------
Total current liabilities 11,379
Commitments and contingencies (see Note 9)
Deferred taxes 2,346
-------------
Total liabilities 13,725
-------------
Net assets $ 20,976
-------------
The accompanying notes are an integral part of these financial statements.
F-15
AT&T EasyLink Services
(A fully integrated business of AT&T Corp.)
Combined Statement of Income and Changes in Net Assets
For the Year Ended December 31, 2000
(In thousands of dollars)
--------------------------------------------------------------------------------
Service revenues $ 126,129
Cost of services
Access costs 15,795
International settlements 11,141
Network operations 16,592
Depreciation and amortization 8,443
Provision for uncollectibles 1,345
Other costs and services 6,280
-------------
Total cost of services 59,596
Gross margin 66,533
Selling, general and administrative
Product management 4,970
Strategic planning and information systems 255
Customer care 6,473
Sales and marketing 15,454
Research and development 16,519
Corporate overhead and other general and administrative 3,555
-------------
Total operating expenses 47,226
Operating income 19,307
Other income 269
-------------
Income before income taxes 19,576
Provision for income taxes 7,701
-------------
Net income 11,875
Distributions to AT&T, net (15,286)
Net assets, beginning of year 24,387
-------------
Net assets, end of year $ 20,976
-------------
The accompanying notes are an integral part of these financial statements.
F-16
AT&T EasyLink Services
(A fully integrated business of AT&T Corp.)
Combined Statement of Cash Flows
For the Year Ended December 31, 2000
(In thousands of dollars)
--------------------------------------------------------------------------------
Operating activities
Cash flows from operating activities
Net income $ 11,875
Adjustments to net income to cash provided by (used in)
operating activities
Depreciation and amortization 8,443
Provision for deferred income taxes (836)
Provision for uncollectibles 1,345
Distributions to AT&T Corp. (15,286)
Changes in operating assets and liabilities
Decrease in accounts receivable 1,726
Decrease in accounts payable (4,355)
Decrease in accrued payroll and benefits (298)
Decrease in accrued expenses (215)
Decrease in agent commissions (79)
-------------
Net cash provided by operating activities 2,320
Investing activities
Additions to plant and equipment (2,320)
-------------
Net cash used in investing activities (2,320)
-------------
Net change in cash $ -
-------------
The accompanying notes are an integral part of these financial statements.
F-17
AT&T EasyLink Services
(A fully integrated business of AT&T Corp.)
Notes to the Combined Financial Statements
--------------------------------------------------------------------------------
1. Organization and Description of Business
AT&T EasyLink Services ("AT&T EasyLink" or the "Company") is a fully
integrated business of AT&T Corp.
As an integrated business of AT&T, the Company relies on AT&T and other
AT&T affiliates ("AT&T") to provide administration, management and
other services including, but not limited to, management information
systems, telecommunication services, accounting and financial
reporting, treasury, cash management, human resources, employee benefit
administration, payroll, legal, tax planning and compliance, and other
support services. The Company receives cost allocations from AT&T for
these services (see Note 2). However, these costs may not be indicative
of costs that would have been incurred had the Company operated
autonomously or as an entity independent of AT&T.
The Company is a data telecommunications services entity that provides
electronic messaging and fax services to customers worldwide. The
nature of the services the Company offers includes electronic mail,
enhanced fax (including worldwide broadcast fax), telex and a
collection of other on-line services for professional use, including
stock quotes, credit histories and corporate bulletin boards. The Telex
product line offers messaging services to certain industries and
countries that do not have modern telecommunications equipment.
On January 31, 2001, Swift Telecommunications, Inc. ("STI") an
international business messaging services company, purchased the AT&T
EasyLink Services business for $50 million. AT&T received $15 million
cash and a $35 million note due in 48 monthly installments with an
initial interest rate of 10% (subject to adjustment every six months
after the closing date to prime plus 1%). The note is collateralized by
all of STI's assets. On February 23, 2001, Mail.com, Inc., a leading
global provider of outsourced messaging services, acquired STI and
assumed the $35 million note. In accordance with the agreement for the
purchase transaction, certain assets, namely certain International
settlement receivables and International cash balances, of the AT&T
Easy Link entity have been excluded from the transaction and have been
excluded from the accompanying financial statements as of December 31,
2000. The purchase price for STI was approximately $83.6 million. On
April 2, 2001, Mail.com, Inc. formally changed its corporate name and
identity to EasyLink Services Corporation.
AT&T Corp. has agreed to provide certain transition services to AT&T
EasyLink Services Corporation including network support, training, and
other administrative services under the terms of such agreements
generally for a period of three months after the sale of the Company.
2. Basis of Presentation and Significant Accounting Policies
Basis of Presentation
As an integrated business of AT&T, the Company does not prepare
separate financial statements in accordance with Generally Accepted
Accounting Principles ("GAAP") in the normal course of operations.
Accordingly, the accompanying combined financial statements have been
derived by
F-18
AT&T EasyLink Services
(A fully integrated business of AT&T Corp.)
Notes to the Combined Financial Statements
--------------------------------------------------------------------------------
extracting certain of the assets, liabilities, and revenues and
expenses of the Company from the consolidated assets, liabilities, and
revenues and expenses from the accounting records of AT&T. These
combined financial statements primarily include the results of AT&T's
U.S. EasyLink operations and AT&T EasyLink Services Limited (a U.K.
operation). All significant inter-entity balances and transactions
between AT&T EasyLink Services and its combined operations have been
eliminated. The Company has excluded from the combined financial
statements certain receivables relating to international settlement
balances due from foreign telecommunications providers. Approximately
$23.8 million of receivables relating to these settlements have been
excluded from the financial statements of the Company as they will be
settled by AT&T Corp. The accompanying combined financial statements
reflect the assets, liabilities, and revenues and expenses directly
attributable to the Company, as well as allocations deemed reasonable
by management to present the financial position, results of operations
and cash flows of the Company on a stand-alone basis. Although
management is unable to estimate the actual costs that would have been
incurred if the services performed by AT&T had been purchased from
independent third parties, the allocation methodologies have been
described within the respective footnotes, where appropriate, and
management considers the allocations to be reasonable. However, the
financial position, results of operations and cash flows of the Company
may differ from those that may have been achieved had the Company
operated autonomously or as an entity independent of AT&T.
Revenue Recognition Policy
The Company recognizes revenue for its electronic messaging services as
the services are provided to the customer, based upon usage and/or the
number of lines used.
In certain contractual arrangements, the Company provides outsourcing
services in the capacity as an agent for certain clients. In these
cases, the Company is responsible for the payment of all invoices
related to the provision of telecommunications services to its clients
by service providers other than AT&T EasyLink. In these cases, the
Company records only the fees related to its aging responsibilities and
neither costs nor the related revenues are reported by the Company.
However, in other cases, the Company is ultimately responsible for the
provision of such services and may choose any other service providers
to fulfill its contractual obligations to its customers. In this type
of arrangement, the Company records both the revenue and the related
service provider costs for financial statement purposes.
During 2000, the Company adopted Securities and Exchange Commission
("SEC") Staff Accounting Bulletin No 101, "Revenue Recognition in
Financial Statements." The adoption did not have a material impact on
the Company's results of operations or financial position.
Plant and Equipment
Equipment is stated at cost. Depreciation on equipment has been
calculated using a straight-line method with estimated useful lives of
approximately 5 years for the majority of the Company's equipment.
Software purchases are depreciated on a straight-line basis over a
period of three years.
Upon sale or other disposition of equipment, the cost and related
accumulated depreciation are removed from the Company's accounts and
any gain or loss is recorded in the results of operations. Gains or
losses were not material for 2000.
F-19
AT&T EasyLink Services
(A fully integrated business of AT&T Corp.)
Notes to the Combined Financial Statements
--------------------------------------------------------------------------------
Valuation of Long-Lived Assets
Long-lived assets such as plant and equipment and software are reviewed
for impairment whenever events or changes in circumstances indicate
that the carrying amount may not be recoverable. If the sum of the
expected future undiscounted cash flows is less than the carrying
amount of the asset, a loss is recognized for the difference between
the estimated fair value and carrying value of the asset. No such
losses have been recognized for 2000.
Software Capitalization
Certain direct development costs associated with internal-use software
are capitalized in accordance with AICPA Statement of Position ("SOP")
98-1, "Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use." Costs capitalized include external direct
costs of materials and services and payroll costs for employees
devoting time to the software projects. These costs are amortized over
a period of three years (beginning when the asset is substantially
ready for use). Costs incurred during the preliminary project stage, as
well as maintenance and training costs, are expensed as incurred.
Accounts Receivable and Uncollectibles
Accounts receivable are directly attributable to the Company and
include amounts earned under the AT&T EasyLink service agreements.
Uncollectible reserves have been determined based on the Company's
specific experience and historical trends.
In connection with the acquisition of the Company described in Note 1,
AT&T, has retained the billed and unbilled accounts receivable of AT&T
EasyLink related to international settlement balances due from foreign
telecommunications providers. As such, balances amounting to $23.8
million have been excluded from the accompanying financial statements.
Accrued Expenses
AT&T does not maintain separate, identifiable records for the Company's
accounts payable and accrued expenses. Accordingly, these financial
statements do not specifically reflect such liabilities, if any.
However, certain direct liabilities specifically attributable to the
Company's operations have been reflected in the Statement of Net Assets
under the caption, Accrued Expenses.
Cost of Services
Cost of Services includes both costs directly identifiable to the
Company's operations, as well as costs allocated from AT&T which relate
to the Company's utilization of certain AT&T Business Services ("ABS")
products. These costs represent the approximate cost that would be
incurred by AT&T to service the ultimate customer of the AT&T EasyLink
business.
Operating Expenses and Corporate Overhead
Operating expenses represent an allocation of AT&T's operating expenses
and include payroll and other expenses related to marketing and sales,
research and development, network operations and common support costs,
such as treasury, cash management, accounting, financial management,
legal, public relations, information systems, human resources, employee
benefits, taxes and support services. Also, included are charges for
certain office space which the Company shares with AT&T. Payroll costs
have been allocated to the Company based on the ratio that the average
number of employees of the Company bears to the average total employees
of ABS, the AT&T unit in which AT&T EasyLink resides. The AT&T
corporate overhead
F-20
AT&T EasyLink Services
(A fully integrated business of AT&T Corp.)
Notes to the Combined Financial Statements
--------------------------------------------------------------------------------
expense pool has been allocated to the Company based on the ratio that
total operating expenses of EasyLink (before allocated overhead) bears
to the comparable total operating expenses of ABS, the unit that AT&T
EasyLink reports through in the ultimate consolidation of AT&T's
businesses. In the opinion of management, the methods used to allocate
the costs and the resulting costs allocated to the Company are
reasonable.
Foreign Currency Translation
For operations outside the United States that prepare financial
statements in currencies other than the U.S. dollar, the Company
translates income statement amounts at average exchange rates for the
year, and the Company translates assets and liabilities at year-end
exchange rates. The effects of these translation adjustments were
insignificant for the year ending December 31, 2000. Gains and losses
from foreign currency transactions, which were not material, have been
included in the results of operations.
Income Taxes
The Company is not a separate taxable entity for Federal and state
income tax purposes and the results of the Company's operations are
included in the Federal and state tax returns of AT&T and its
affiliates. In these financial statements, the Company has provided for
income taxes as if it were a separate taxpayer.
Deferred income taxes have been accounted for under the liability
method, whereby deferred tax assets and liabilities are established for
the differences between the financial reporting and income tax basis of
assets and liabilities, as well as net operating losses and tax credit
carryforwards. Deferred tax assets are reduced by a valuation allowance
when, in the opinion of management, it is more likely than not that
some portion or all of the deferred tax assets will not be realized.
Deferred tax assets and liabilities are adjusted for the effects of
changes in tax laws and rates on the date of enactment.
Cash Flows
The Company does not maintain separate cash accounts for the U.S. AT&T
EasyLink operations; in the U.S., all cash generated by the business is
recorded and managed by AT&T. All U.S. cash receipts and disbursements
are made through AT&T's cash management system. For purposes of the
statement of cash flows, all transactions between the Company and AT&T
have been accounted for as having been settled in cash at the time the
transaction was recorded by the Company. The net cash provided by the
Company has been presented as a distribution to AT&T in the
accompanying financial statements. The Company's foreign operations
maintain their own cash accounts. As stated in Note 1, in accordance
with the Purchase Transaction, such cash has been retained by AT&T and
as such $4.1 million has been excluded from the accompanying financial
statements as of December 31, 2000.
Due to the integrated nature of the operations of AT&T and AT&T
EasyLink Services, the net distribution to AT&T by the Company for the
year ended December 31, 2000 has been presented as a component of
operating cash flow.
Advertising and Promotional Expenses
The Company expenses costs of advertising and promotions, including
costs to acquire customers, as incurred. Advertising and promotional
expenses were only $40 for the year ended December 31, 2000.
Use of Estimates
The preparation of financial statements in conformity with GAAP
requires management to make estimates and assumptions that affect the
reported amount of assets and liabilities at the date of
F-21
AT&T EasyLink Services
(A fully integrated business of AT&T Corp.)
Notes to the Combined Financial Statements
--------------------------------------------------------------------------------
the financial statements and the reported amounts of revenue and
expenses during the reporting period. The most significant assumptions
and estimates relate to the allocation of certain operating and
overhead expenses and the calculation of the allowance for
uncollectibles. Actual results could differ materially from those
estimates.
Concentrations
As of December 31, 2000, the Company does not have any significant
concentration of business transacted with a particular customer.
However, the Company relies almost exclusively upon AT&T for the
provision of its telecommunications services. The loss of such services
could severely impact the Company's operations while alternative
sources are being identified.
3. Transactions with Affiliates
The Company, in the normal course of operations, conducts transactions
with AT&T. Revenues from services provided to AT&T and its affiliates
by the Company amounted to $3.2 million for the year ended December 31,
2000. Such activity has been priced at the rates being charged by
EasyLink Services Corporation to AT&T subsequent to the acquisition
described in Note 1.
In addition, the Company contracts with AT&T and its affiliates for
telecommunications services. The amount of telecommunications expenses
was $5.4 million for the year ended December 31, 2000. Such activity
has been priced at the rates being charged by AT&T to EasyLink Services
Corporation subsequent to the acquisition described in Note 1.
4. Plant and Equipment
Plant and equipment consists primarily of network access and messaging
equipment. The cost basis of this equipment was $69,484 and the
accumulated depreciation amounted to $56,116 as of December 31, 2000.
5. Capitalized Software Costs
The Company has accumulated $4,089 of direct development costs
associated with internal-use software as of December 31, 2000 and is
amortizing these costs on a straight-line basis over three years.
Amortization expenses were $1,360 in 2000 and accumulated amortization
amounted to $1,768,000 at December 31, 2000.
6. Net Assets
As the Company is a fully integrated business, AT&T's accounting
records do not distinguish its investment in the Company between debt
and permanent capital. In addition, AT&T, in the normal course of
operations, does not allocate any portion of its consolidated third
party debt and directly related interest cost to the Company and no
portion of AT&T's debt is directly related to the operations of the
Company.
The intercompany balance has been classified as a component of the
Company's net assets in these financial statements as there is no debt
instrument and no defined payment period.
F-22
AT&T EasyLink Services
(A fully integrated business of AT&T Corp.)
Notes to the Combined Financial Statements
--------------------------------------------------------------------------------
7. Income Taxes
The Company has calculated the tax provision utilizing an effective tax
rate as if it were a stand-alone company.
The effective tax rate in 2000 differs from the statutory U.S. Federal
rate due primarily to the impact of the state income taxes, net of
federal benefit.
AT&T EasyLink Services Limited is a pass through entity for Federal
income tax purposes and as such, its losses serve to reduce the
combined operations taxable income.
The provision for income taxes for the year ended December 31, 2000
comprises the following:
December 31, 2000
Current
Federal $ 6,931
State and local 1,606
-------------
Total current provision 8,537
-------------
Deferred
Federal (679)
State (157)
-------------
Total deferred provision (benefit) (836)
-------------
Total provision for income taxes $ 7,701
-------------
Deferred tax assets (liabilities) at December 31, 2000 are as follows:
December 31, 2000
Deferred tax assets - current $ 2,562
-------------
Total deferred tax assets 2,562
-------------
Deferred tax liabilities - noncurrent 2,346
-------------
Total deferred tax liabilities 2,346
-------------
Net deferred taxes $ 216
-------------
F-23
AT&T EasyLink Services
(A fully integrated business of AT&T Corp.)
Notes to the Combined Financial Statements
--------------------------------------------------------------------------------
The significant types to temporary differences giving rise to deferred
taxes include plant and equipment basis differences (deferred tax
liabilities) and currently non-deductible reserves (deferred tax
assets).
8. Employee Benefit Plans
The Company participates in various employee benefit plans, including
pensions, savings, post-retirement and post-employment plans, which are
sponsored by AT&T. Detailed information concerning costs or the funded
status of the plan is not available for the Company but is included as
part of the operating expenses allocated by AT&T as described in Note
2. The specific amounts allocated to the Company and the Company's
obligations under these plans are not separately determinable by plan.
9. Commitments and Contingencies
The Company is subject to a number of judicial, regulatory and
administrative proceedings in the normal course of business. The
Company's management does not believe that any material liability will
be imposed as a result of any of these matters.
10. Segment Reporting
The Company has considered the impact of Statement of Financial
Accounting Standards No. 131, "Disclosures About Segments of an
Enterprise and Related Information." As a fully integrated business of
AT&T Corp., the Company had not been viewed as a reportable business
segment, but rather as a component of a much larger operation providing
business-related telecommunications services. As a stand-alone entity,
the Company operates as a single segment comprised of business
electronic messaging services. Revenues from external customers and
long-lived assets information by geographic area are summarized as
follows:
United All Foreign Combined
States Countries Total
Revenues from external customers $ 112,534 $ 13,595 $ 126,129
Long-lived assets, net $ 14,980 $ 709 $ 15,689
11. New Accounting Pronouncements
The Financial Accounting Standards Board's ("FASB's") Statement of
Financial Accounting Standard, or SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities," as amended by SFAS No.
137, "Accounting for Derivative Instruments and Hedging
Activities--Deferral of the Effective Date of FASB Statement No. 133,"
and SFAS No. 138, "Accounting for Certain Derivative Instruments and
Certain Hedging Activities," is effective for the Company as of January
1, 2001. This statement establishes accounting and reporting standards
requiring that derivative instruments (including certain derivative
instruments embedded in other contracts) be
F-24
AT&T EasyLink Services
(A fully integrated business of AT&T Corp.)
Notes to the Combined Financial Statements
--------------------------------------------------------------------------------
recorded in the balance sheet as either an asset or liability measured
at its fair value. This statement requires that changes in the
derivative's fair value be recognized currently in earnings unless
specific hedge accounting criteria are met. Special accounting for
qualifying hedges allows a derivative's gains and losses to offset
related results on the hedged item in the income statement, and
requires a company to formally document, designate and assess the
effectiveness of transactions that receive hedge accounting, SFAS No.
133 must be applied to (a) derivative instruments and (b) certain
derivative instruments embedded in hybrid contracts that were issued,
acquired, or substantively modified after December 31, 1997 (and, at
the Company's election, before January 1, 1998). The Company has no
derivative financial instruments as of December 31, 2000 and as such,
the adoption of this standard will have no material effect on its
combined results of operations or financial position.
In September 2000 the FASB issued SFAS No. 140 "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities." This statement provides accounting and reporting
standards for transfers and servicing of financial assets and
extinguishments of liabilities and also provides consistent standards
for distinguishing transfers of financial assets that are sales from
transfers that are secured borrowings. SFAS No. 140 is effective for
recognition and reclassification of collateral and for disclosures
relating to securitization transactions and collateral for fiscal years
ending after December 15, 2000, and is effective for transfers and
servicing of financial assets and extinguishments of liabilities
occurring after March 31, 2001. The Company has had no activities which
are subject to the provisions of this standard.
F-25
ITEM 7. PRO FORMA FINANCIAL INFORMATION
(b) EasyLink Services Corporation - Unaudited Pro Forma Condensed Combined
Financial Information
On January 31, 2001, Mail.com, Inc. and Swift Telecommunications, Inc. ("STI"),
a New York Corporation, entered into an Agreement and Plan of Merger ("Merger
Agreement"). On February 23, 2001, Mail.com, Inc. 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 messaging 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 is
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 in the
merger. The note is payable in equal monthly installments over four years and
bears interest at the rate of 10% per annum. The note is subject to mandatory
prepayment upon the sale of specified assets of STI, including the EasyLink
Services business, and in certain other events. The note also contains certain
customary covenants and events of default, including limitations on the ability
of EasyLink to incur additional indebtedness and to incur additional liens on
the STI and EasyLink assets.
Upon the closing of the acquisition of STI, the Company paid to the sole
shareholder of STI $835,000 in cash and issued an unsecured note for $9,188,000
and 18,766,176 shares of EasyLink Class A common stock as consideration for the
acquisition of STI valued at $30.8 million. 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 will be 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 is non-interest bearing unless the Company fails to make a required payment
within 30 days after the due date therefore. Thereafter, the note will bear
interest at the rate of 10% per annum. The note also contains certain customary
covenants and events of default.
The cash portion of the merger consideration and the reimbursement of payments
made by the sole shareholder of STI were funded out EasyLink's available cash
generated from operations and from the proceeds received by Mail.com on January
8, 2001 from the issuance of $10.3 million of 10% Senior Convertible Notes due
January 8, 2006.
The Company will allocate 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 will be allocated to goodwill and other intangible assets. Goodwill and
other intangible assets are expected to be amortized over periods of five to
ten years, the expected estimated periods of benefit. The purchase price
allocation is dependant on 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 potential identification of certain intangible
assets such as customer lists, in-place workforce, technology and trademarks,
etc.
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.
In January 2001, STI sold substantially all of the assets and liabilities of its
subsidiary in Italy to Xpedite Communications S.r.L. for $2.3 million in cash
and a note receivable of $2.5 million. The note is non-interest bearing and
payable in monthly installments over three years. The cash proceeds from the
sale were used to: (i) pay down the $1,009,000 advance from the sole stockholder
of STI; (ii) pay a dividend to the sole stockholder of STI of approximately
$891,000; and (iii) the remaining balance used to pay liabilities of STI. The
Company will also pay additional consideration to the sole shareholder of STI
equal to the amount of the net proceeds, if any, after satisfaction of certain
liabilities of STI and its subsidiaries, from the sale or liquidation of the
assets of STI's subsidiary in Italy.
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. The
Company does not believe that this acquisition would have a significant impact
on its pro forma financial position and results of operations for the period
reported. Accordingly, the Xtreme financial information is not included in the
following pro forma condensed consolidated financial statements.
As part of the transaction with STI, the Company entered into a letter agreement
to acquire Telecom International, Inc. (which is an affiliate of STI through its
sole shareholder and conducts
business under the name "AlphaTel") or the 25% minority interests in its two STI
subsidiaries that operate the businesses acquired from Xpedite Systems, Inc.
for $164,705 in cash, promissory notes in the aggregate principal amount of
approximately $1.8 million and 3.7 million shares of EasyLink Class A common
stock. These additional transactions are subject to execution of due diligence,
definitive documentation, receipt of regulatory approvals and other customary
conditions. This accompanying pro forma condensed consolidated financial
statements do not give effect to the proposed acquisitions of Telecom
International, Inc. or the 25% minority interests due to the uncertainty as to
the timing and/or completion of these acquisitions.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The unaudited pro forma condensed consolidated statement of operations for the
year ended December 31, 2000 gives effect to the acquisition of STI and STI's
acquisition of the EasyLink Services business, as if they had occurred on
January 1, 2000. The unaudited pro forma condensed consolidated balance sheet as
of December 31, 2000 gives effect to the acquisition of STI and STI's
acquisition of the EasyLink Services business, as if they had occurred on
December 31, 2000 based on the purchase method of accounting. These transactions
will be accounted for as purchase business combinations.
EasyLink believes the accounting used for the pro forma adjustments provides a
reasonable basis on which to present the unaudited pro forma condensed
consolidated financial statements. The pro forma adjustments do not include any
synergies expected to be derived from the merger.
The unaudited pro forma condensed consolidated statement of operations and
unaudited pro forma condensed consolidated balance sheet were derived by
adjusting the historical consolidated financial statements of EasyLink (formerly
Mail.com), STI and the EasyLink Services business. The unaudited pro forma
condensed consolidated financial statements are provided for informational
purposes only and should not be construed to be indicative of EasyLink's
consolidated financial position or results of operations had the transaction
been consummated on the date assumed and do not project EasyLink's consolidated
financial position or results of operations for any future date or period.
Certain assets, liabilities and stockholders' equity/net asset balances in the
consolidated balance sheets of EasyLink (formerly Mail.com), STI, and the
EasyLink Services business have been reclassified to conform to the line item
presentation in the pro forma condensed consolidated balance sheet. Certain
costs and other deductions in the consolidated statements of operations of
EasyLink (formerly Mail.com), STI, and the EasyLink Services business have been
reclassified to conform to the line item presentation in the pro forma condensed
consolidated statement of operations.
The unaudited pro forma consolidated financial statements and accompanying notes
should be read in conjunction with EasyLink's (formerly Mail.com) historical
consolidated financial statements and notes thereto included in EasyLink's
Annual Report on Form 10-K for the year ended December 31, 2000, as well as
STI's and EasyLink Services business's historical consolidated financial
statements and notes thereto included herein.
EASYLINK SERVICES CORPORATION AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
DECEMBER 31, 2000
(dollars in thousands)
EasyLink
Services Swift
Corporation Telecommunications, AT&T EasyLink
(formerly Mail.com) Inc. Services
-------------------- --------------------- -----------------
ASSETS
Current assets:
Cash and cash equivalents $ 7,409 $ 30 $ -
Marketable securities 22,202 - -
Accounts receivable, net 13,727 2,611 16,450
Prepaid expenses and other current assets 2,783 531 -
Deferred tax asset - - 2,562
-------------------- --------------------- -----------------
Total current assets 46,121 3,172 19,012
-------------------- --------------------- -----------------
Property and equipment, net 50,916 1,794 15,689
Domain assets, net 6,975 - -
Partner advances, net 3,841 - -
Investments in affiliated companies 14,851 1,415 -
Goodwill and other intangible assets, net 200,994 793 -
Note receivable - - -
Restricted investments 1,710 - -
Debt issuance costs 3,089 - -
Other 1,764 - -
-------------------- --------------------- -----------------
Total assets $ 330,261 $ 7,174 $ 34,701
==================== ===================== =================
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable $ 15,465 $ 2,320 $ 7,276
Accrued expenses 25,888 3,095 4,103
Restructuring reserve 4,048 - -
Current portion of capital lease obligations 11,443 - -
Current portion of domain asset purchase
obligations 39 - -
Current portion of notes payable 1,861 1,400 -
Advances from related party - 1,009
Deferred revenue 1,925 - -
Other current liabilities 1,142 224 -
-------------------- --------------------- -----------------
Total current liabilities 61,811 8,048 11,379
-------------------- --------------------- -----------------
Capital lease obligations, less current portion 14,319 - -
Domain asset purchase obligation, less current
portion 85 - -
Deferred revenue 775 - -
Deferred tax liability - - 2,346
Notes payable, less current portion 100,321 - -
-------------------- --------------------- -----------------
Total liabilities 177,311 8,048 13,725
-------------------- --------------------- -----------------
Minority interest 14,204 - -
Stockholders' equity (deficit):
Common stock, $0.01 par value
Class A 518 - -
Class B 100 - -
Additional paid-in capital 445,675 - -
Subscriptions receivable (33) - -
Deferred compensation (214) - -
Accumulated other comprehensive loss (137) 4 -
Accumulated deficit (307,163) (878) -
Net assets - - 20,976
-------------------- --------------------- -----------------
Total stockholders' equity (deficit) 138,746 (874) 20,976
-------------------- --------------------- -----------------
Commitments and contingencies
-------------------- --------------------- -----------------
Total liabilities and stockholders'
equity (deficit) $ 330,261 $ 7,174 $ 34,701
==================== ===================== =================
Proforma Pro Forma
Adjustments Total
----------------- -----------------
ASSETS
Current assets:
Cash and cash equivalents $ 10,260 1 $ 2,264
(15,000) 1
(835) 1
2,300 7
(1,900) 7
Marketable securities - 22,202
Accounts receivable, net (1,472) 5 31,316
Prepaid expenses and other current assets (192) 5 3,122
Deferred tax asset (2,562) 6 -
----------------- -----------------
Total current assets (9,401) 58,904
----------------- -----------------
Property and equipment, net (1,280) 5 67,119
Domain assets, net - 6,975
Partner advances, net - 3,841
Investments in affiliated companies (1,400) 7 14,866
Goodwill and other intangible assets, net 216 6 273,483
1,280 5
(793) 1
70,993 1
Note receivable 1,800 7 1,800
Restricted investments - 1,710
Debt issuance costs - 3,089
Other - 1,764
----------------- -----------------
Total assets $ 61,415 $ 433,551
================= =================
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable $ - $ 25,061
Accrued expenses (1,472) 5 32,884
1,270 1
Restructuring reserve - 4,048
Current portion of capital lease obligations - 11,443
Current portion of domain asset purchase
obligations - 39
Current portion of notes payable 12,425 3 15,686
Advances from related party (1,009) 7 -
Deferred revenue (192) 5 1,733
Other current liabilities - 1,366
----------------- -----------------
Total current liabilities 11,022 92,260
----------------- -----------------
Capital lease obligations, less current portion - 14,319
Domain asset purchase obligation, less current
portion - 85
Deferred revenue - 775
Deferred tax liability (2,346) 6 -
Notes payable, less current portion 40,185 3 140,506
----------------- -----------------
Total liabilities 48,861 247,945
----------------- -----------------
Minority interest - 14,204
Stockholders' equity (deficit):
Common stock, $0.01 par value
Class A 188 1 706
Class B - 100
Additional paid-in capital 30,659 1 476,334
Subscriptions receivable - (33)
Deferred compensation - (214)
Accumulated other comprehensive loss (4) 4 (137)
Accumulated deficit 878 4 (305,354)
(891) 7
2,700 7
Net assets (20,976) 4 -
----------------- -----------------
Total stockholders' equity (deficit) 12,554 171,402
----------------- -----------------
Commitments and contingencies
----------------- -----------------
Total liabilities and stockholders'
equity (deficit) $ 61,415 $ 433,551
================= =================
See notes to unaudited pro forma condensed consolidated financial statements.
EASYLINK SERVICES CORPORATION AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED STATEMENT OF CONSOLIDATED OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 2000
(dollars in thousands, except share and per share amounts)
EasyLink Historical (1) (Predecessor Business)(2)
Services Swift Swift
Corporation Telecommunications, Telecommunications,
(formerly Mail.com) Inc. Inc.
-------------------- --------------------- -------------------------
Revenues $ 61,222 $ 4,230 $ 8,779
-------------------- --------------------- -------------------------
Operating expenses:
Cost of revenues 55,732 1,927 8,960
Sales and marketing 66,891 - -
General and administrative 45,439 2,995 4,052
Product development 19,528 - -
Amortization of goodwill and other
intangibles 60,763 48 -
Write-off of acquired in-process technology 7,650 - -
Impairment of intangible assets 7,800 - -
Restructuring charges 18,388 - -
-------------------- --------------------- -------------------------
Total operating expenses 282,191 4,970 13,012
-------------------- --------------------- -------------------------
(Loss) income from operations (220,969) (740) (4,233)
-------------------- --------------------- -------------------------
Other income (expense):
Interest income 5,194 - -
Interest expense (9,632) (3) -
Impairment of investments (4,400) - -
Loss on equity investment (2,100) - -
Other, net (104) - -
-------------------- --------------------- -------------------------
Total other income (expense), net (11,042) (3) -
-------------------- --------------------- -------------------------
(Loss) income before income taxes and
minority interest (232,011) (743) (4,233)
-------------------- --------------------- -------------------------
Provision for income taxes - 135 -
Minority interest 2,484 - -
-------------------- --------------------- -------------------------
Net (loss) income $ (229,527) $ (878) $ (4,233)
==================== ===================== =========================
Basic and diluted net loss per share $ (4.02)
====================
Weighted-average basic and diluted shares
outstanding 57,158,562
====================
AT&T EasyLink Pro Forma Pro Forma
Services Adjustments Total
--------------------- ----------------- ------------------
Revenues $ 126,129 $ (1,280) 5 $ 199,080
--------------------- ----------------- ------------------
Operating expenses:
Cost of revenues 59,596 (1,345) 8 124,870
Sales and marketing 20,424 87,315
General and administrative 10,283 200 9 64,314
1,345 8
Product development 16,519 36,047
Amortization of goodwill and other
intangibles - 8,649 2 69,412
(48) 2
Write-off of acquired in-process technology 7,650
Impairment of intangible assets 7,800
Restructuring charges 18,388
--------------------- ----------------- ------------------
Total operating expenses 106,822 8,801 415,796
--------------------- ----------------- ------------------
(Loss) income from operations 19,307 (10,081) (216,716)
--------------------- ----------------- ------------------
Other income (expense):
Interest income - - 5,194
Interest expense - (4,561) 3 (14,196)
Impairment of investments - - (4,400)
Loss on equity investment - - (2,100)
Other, net 269 - 165
--------------------- ----------------- ------------------
Total other income (expense), net 269 (4,561) (15,337)
--------------------- ----------------- ------------------
(Loss) income before income taxes and
minority interest 19,576 (14,642) (232,053)
--------------------- ----------------- ------------------
Provision for income taxes 7,701 (7,836) 6 -
Minority interest - - 2,484
--------------------- ----------------- ------------------
Net (loss) income $ 11,875 $ (6,806) $ (229,569)
===================== ================= ==================
Basic and diluted net loss per share $ (3.02)
==================
Weighted-average basic and diluted shares
outstanding 18,766,176 10 75,924,738
================= ==================
(1) Represents the formal operations of the business of STI from August 1, 2000
(date of acquisition by STI of certain trade assets from GN Comtext Limited)
through December 31, 2000.
(2) Represents the predecessor operations of STI from January 1, 2000 through
July 31, 2000.
See notes to unaudited pro forma condensed consolidated financial statements.
Notes to Unaudited Pro Forma Condensed Consolidated Financial Information
(Dollars in thousands, except share and per share amounts)
(A) Pro Forma Adjustments and Assumptions
(1) For purposes of these pro forma condensed consolidated financial
statements, EasyLink has assumed that the value of the total
purchase is as follows:
Upon the closing of the acquisition of STI, the Company:
(i) paid to the sole shareholder of STI $835 in cash;
(ii) issued an unsecured non-interest bearing note for $9,188.
The note will be 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 is non-interest bearing unless
the Company fails to make a required payment within 30 days
after the due date thereon. Thereafter, the note will bear
interest at the rate of 10% per annum. For accounting
purposes, the non-interest bearing note was recorded at its
present value of $7,350 using an effective interest rate of
10% (see note 3 below); and,
(iii) issued 18,766,176 shares of EasyLink Class A common stock as
consideration for the acquisition of STI. Under the terms of
the Merger Agreement, the sole shareholder of STI will
receive 18,766,176 shares of EasyLink Class A common stock.
The fair value of EasyLink's Class A common stock issued was
approximately $1.64 per share based on the average market
price of EasyLink's Class A 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.
(iv) 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 (see note 3 below). The $35 million
note is 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 in the merger. The note
is payable in equal monthly installments over four years and
bears interest at the rate of 10% per annum.
(v) The cash portion of the merger consideration and the
reimbursement of $1 million in payments made by the sole
shareholder of STI were funded out of EasyLink's available
cash generated from operations and from the proceeds
received by Mail.com on January 8, 2001 from the issuance of
$10.3 million of 10% Senior Convertible Notes due January 8,
2006 (see note 3 below).
STI Consideration
Cash $ 835 (i)
Present Value of $9.2 Million Note
Payable to Sole Stockholder of STI 7,350 (ii)
Shares issued to Sole Stockholder of STI 18,766,176 shares
Fair value of EasyLink's Common Stock
as of the Announcement Date on
February 8, 2001 x $ 1.6437 per share
--------------------------
30,847 (iii)
----------------------
Subtotal $ 39,032
----------------------
EasyLink Services Business Consideration
Cash $ 15,000 (iv)
Assumption of $35 Million Note $ 35,000 (iv)
----------------------
Subtotal $ 50,000
----------------------
Total Consideration $ 89,032
======================
Add: Estimated Direct Merger Costs $ 1,270
----------------------
Total Purchase Price $ 90,302
Less: Fair Value Of Net Tangible Assets
Acquired And Liabilities
Assumed $ 17,813
----------------------
Excess Purchase Price Over Net Assets Acquired $ 72,489
======================
Estimated Fair Value of Net Tangible Assets Acquired and Liabilities Assumed as of December 31, 2000:
Easylink
Services
STI Business Total
-------------------------------------
Historical Net Book Values $ (874) $ 20,976 $ 20,102
Less Purchase Accounting Adjustments
Note (5) Elimination of capitalized software license (1,280) - (1,280)
Note (6) Elimination of deferred taxes - (216) (216)
Elimination of STI's pre-existing goodwill (793) - (793)
-------------------------------------
$ (2,947) $ 20,760 $ 17,813
=====================================
(2) The following represents the allocation of the purchase price over
the historical net book values of the net tangible assets acquired
and liabilities assumed of STI and the EasyLink Services business
at December 31, 2000, and is for illustrative pro forma purposes
only. This allocation is preliminary and may be subject to change
upon evaluation of the fair value of STI's and the EasyLink
Services business's acquired assets and liabilities assumed as of
the acquisition date as well as the identification of certain
intangibles. The final allocation of the purchase consideration
will be determined after the completion of the merger and will be
based on appraisals and a comprehensive final evaluation of the
fair values and useful lives of STI's and the EasyLink Services
business's tangible assets acquired and identifiable intangible
assets and excess of purchase price over net assets acquired at
the time of the merger. Actual fair values will be based on
financial information as of the acquisition date. Assuming the
transaction had occurred on December 31, 2000, the allocation
would have been as follows:
Preliminary Allocation of Excess Purchase Price Over Net Assets Acquired as of December 31, 2000:
Annual
Amortization
-----------------
Workforce (5 years) $ 3,000 $ 600
Technology (5 years) 11,000 2,200
Trademarks (10 years) 16,000 1,600
Customer List (10 years) 11,000 1,100
Goodwill (10 years) 31,489 3,149
----------------- -----------------
$ 72,489 $ 8,649
================= =================
(3) To reflect annualized interest expense as a result of additional
debt incurred and assumed in connection with the acquisition of
STI and the EasyLink Services business as follows:
Note payable to 10% Senior
sole shareholder Note payable Convertible Notes
of STI to AT&T due January 2006
(Note 1(ii) above) (Note 1(iv) above) (Note 1(v) above) Total
---------------------------------------------------------------------------------
Notes Payable
Total Notes Payable $ 7,350 $ 35,000 $ 10,260 $ 52,610
Less current portion 3,675 8,750 - 12,425
---------------------------------------------------------------------------------
Long-term portion of notes payable $ 3,675 $ 26,250 $ 10,260 $ 40,185
=================================================================================
Annualized Interest $ 919 $ 3,099 $ 1,026 $ 5,044
=================================================================================
(4) To eliminate the historical equity accounts/net asset balances of
STI and the EasyLink Services business.
(5) To eliminate intercompany software sales of $1,280 and prepaid
maintenance fees/deferred revenues of $192, and the resultant
receivables/payables by and between EasyLink and STI.
(6) This adjustment reflects the reversal of STI's and the EasyLink
Service Business's historical tax provision due to the fact that
STI and the EasyLink Services business operated in tax
jurisdictions where EasyLink had taxable losses exceeding STI's
and the EasyLink Services business's income during such period.
Therefore, had the merger been consummated on January 1, 2000, the
consolidated company would not have incurred these expenses.
Accordingly, deferred tax assets and liabilities have also been
eliminated in connection with the merger.
(7) To record STI's sale of its subsidiary in Italy for $2.3 million
in cash and a note receivable of $2.5 million. For accounting
purposes, the non-interest bearing note was recorded at its
present value of $1.8 million using an imputed interest rate of
10%. The cash proceeds from the sale were used to: (i) pay down
the $1,009 advance from the sole stockholder of STI; (ii) pay a
dividend to the sole stockholder of STI of approximately $891; and
(iii) the remaining balance used to pay liabilities of STI.
(8) The following tables illustrate the reclassifications that were
made to certain EasyLink Service business's historical operating
expenses in order to conform them to the line item presentation
used by EasyLink in its consolidated statement of operations.
For the year ended December 31, 2000:
Historical Adjustment As Adjusted
---------- ---------- -----------
Operating expenses:
Cost of revenues $59,596 $(1,345) $58,251
General and administrative $10,283 $ 1,345 $11,628
(9) To reflect additional compensation expense of $200,000 to be
incurred in connection with the employment agreement of the former
President and sole shareholder of STI.
Any potential pro forma adjustment relating to eligible bonuses,
which have no minimum commitment amount, have been omitted since
the payment of such bonuses is dependent upon the achievement of
performance goals to be established by EasyLink's management.
(10) The pro forma basic and diluted net loss per common share is
computed by dividing the net loss by the weighted average number
of common shares outstanding. The calculation of the weighted
average number of shares outstanding assumes that 18,766,176 of
EasyLink's common stock issued in connection with its acquisition
of STI were outstanding for the entire period. Diluted net loss
per share equals basic net loss per share, as common stock
equivalents are anti-dilutive for all pro forma periods presented.
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on behalf of the undersigned
hereunto duly authorized.
May 9, 2001
EasyLink Services Corporation
By: /s/ Debra McClister
Debra McClister
Executive Vice President and Chief Financial Officer