SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File Number 0-26371
EASYLINK SERVICES CORPORATION
(Exact Name of Registrant as Specified in Charter)
Delaware 13-3787073
(State or other Jurisdiction of) (I.R.S. Employer
Incorporation or Organization) Identification No.)
399 Thornall Street, Edison, NJ 08837
(Address of Principal Executive Office) (Zip Code)
(732) 906-2000
(Registrant's Telephone Number Including Area Code)
Indicate by check whether the registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Common stock outstanding at October 31, 2001: Class A common stock $0.01 par
value 97,601,130 shares, and Class B common stock $0.01 par value 10,000,000
shares.
EASYLINK SERVICES CORPORATION
SEPTEMBER 30, 2001
FORM 10-Q
INDEX
Page
Number
PART I: FINANCIAL INFORMATION
Item 1: Condensed Consolidated Financial Statements:
Condensed Consolidated Balance Sheets as of September 30,
2001 (unaudited) and December 31, 2000..................................................................... 2
Unaudited Condensed Consolidated Statements of Operations for the
three months ended September 30, 2001 and 2000............................................................. 3
Unaudited Condensed Consolidated Statements of Operations for the
nine months ended September 30, 2001 and 2000.............................................................. 4
Unaudited Condensed Consolidated Statements of Cash Flows for the
nine months ended September 30, 2001 and 2000.............................................................. 5
Notes to Unaudited Interim Condensed Consolidated Financial Statements..................................... 7
Item 2: Management's Discussion and Analysis of Financial Condition and Results of Operations...................... 23
Item 3: Qualitative and Quantitative Disclosure about Market Risk.................................................. 34
PART II: OTHER INFORMATION
Item 1: Legal Proceedings........................................................................................ 45
Item 2: Changes in Securities and Use of Proceeds.................................................................. 45
Item 4: Submission of Matters to a Vote of Security Holders........................................................ 46
Item 6: Exhibits and Reports on Form 8-K........................................................................... 46
Item 7: Signatures................................................................................................. 47
EASYLINK SERVICES CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
September 30, December 31,
2001 2000
---- ----
(unaudited) NOTE 1(B)
ASSETS
Current assets:
Cash and cash equivalents............................................................. $11,109 $7,409
Marketable securities................................................................. 20 22,202
Accounts receivable, net of allowance for doubtful accounts of $12,335 and $887 at
September 30, 2001 and December 31, 2000, respectively........................... 30,357 13,727
Prepaid expenses and other current assets............................................. 4,804 2,783
----- -----
Total current assets...................................................... 46,290 46,121
Property and equipment, net........................................................... 28,880 50,916
Domain assets available for sale...................................................... 592 6,975
Partner advances, net................................................................. -- 3,841
Investments........................................................................... 2,119 14,851
Goodwill and other intangible assets, net............................................. 178,296 200,994
Restricted investments................................................................ 279 1,710
Debt issuance costs, net.............................................................. 555 3,089
Other................................................................................. 1,325 1,764
----- -----
Total assets.............................................................. $258,336 $330,261
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable...................................................................... $21,000 $15,465
Accrued expenses...................................................................... 46,427 25,888
Restructuring reserve................................................................. 1,134 4,048
Current portion of capital lease obligations.......................................... 5,492 11,443
Current portion of notes payable...................................................... 35,411 1,861
Deferred revenue...................................................................... 1,094 1,925
Other current liabilities............................................................. 513 1,181
--- -----
Total current liabilities............................................ 111,071 61,811
Capital lease obligations, less current portion....................................... 157 14,319
Deferred revenue, less current portion............................................... 123 775
Notes payable, less current portion................................................... 93,540 100,321
Other long term liabilities........................................................... 698 85
--------- --
Total liabilities.................................................... 205,589 177,311
Minority interest..................................................................... 14,335 14,204
Commitments and contingencies
Stockholders' equity:
Common stock, $0.01 par value; 160,000,000 shares authorized:
Class A--150,000,000 shares authorized; 83,348,003 and
51,789,201 shares issued and outstanding at September 30, 2001
and December 31, 2000, respectively....................................... 833 518
Class B--10,000,000 shares authorized, issued and outstanding
at September 30, 2001 and December 31, 2000 with an aggregate liquidation
preference of $1,000...................................................... 100 100
Additional paid-in capital............................................................ 488,160 445,675
Subscriptions receivable.............................................................. -- (33)
Deferred compensation................................................................. (170) (214)
Accumulated other comprehensive (income) loss......................................... 173 (137)
Accumulated deficit...................................................................(450,684) (307,163)
--------- ---------
Total stockholders' equity........................................... 38,412 138,746
------ -------
Total liabilities and stockholders' equity........................... $258,336 $330,261
======== ========
See accompanying notes to unaudited condensed consolidated financial statements.
2
EASYLINK SERVICES CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(UNAUDITED)
Three Months Ended September 30,
2001 2000
---- ----
Revenues
Messaging............................................................... $36,548 $15,078
Domain development (WORLD.com).......................................... 1,041 3,460
----- -----
Total revenues.............................................. 37,589 18,538
Operating expenses:
Cost of revenues
Messaging............................................................... 19,294 13,945
Domain development (WORLD.com).......................................... 1,086 2,630
----- -----
Total cost of revenues...................................... 20,380 16,575
------ ------
Sales and marketing.................................................................. 5,722 18,385
General and administrative........................................................... 11,350 13,586
Product development.................................................................. 1,787 4,724
Amortization of goodwill and other intangible assets ................................ 12,769 17,779
Impairment of intangibles and other assets........................................... 50 --
-------- --------
Total operating expenses.................................... 52,058 71,049
------ ------
Loss from operations............................ (14,469) (52,511)
-------- --------
Other income (expense):
Interest income......................................................... 136 1,009
Interest expense........................................................ (2,353) (2,717)
Other, net.............................................................. 77 --
-------- --------
Total other income (expense), net........................... (2,140) (1,708)
------- -------
Loss before minority interest and extraordinary gain ................... (16,609) (54,219)
-------- --------
Minority interest.................................................................... 23 964
-------- --------
Loss before extraordinary gain.......................................... (16,586) (53,255)
-------- --------
Extraordinary gain .................................................................. 782 --
-------- --------
Net loss................................................................ $(15,804) $(53,255)
========= =========
Net loss per share - basic and diluted:
Loss before extraordinary gain.......................................... $(0.18) $(0.88)
Extraordinary gain...................................................... 0.01 0.00
-------- --------
Net loss................................................................ $(0.17) $(0.88)
======= =======
Weighted-average basic and diluted shares outstanding .................. 92,794,103 60,287,727
========== ==========
See accompanying notes to unaudited condensed consolidated financial statements.
3
EASYLINK SERVICES CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(UNAUDITED)
Nine Months Ended September 30,
2001 2000
---- ----
Revenues
Messaging.............................................................. $90,128 $38,621
Domain development (WORLD.com)......................................... 5,834 4,891
----- -----
Total revenues............................................. 95,962 43,512
------ ------
Operating expenses:
Cost of revenues
Messaging.............................................................. 59,550 36,222
Domain development (WORLD.com)......................................... 6,146 4,108
----- -----
Total cost of revenues..................................... 65,696 40,330
------ ------
Sales and marketing................................................................. 26,265 50,218
General and administrative.......................................................... 36,754 31,982
Product development................................................................. 8,035 13,856
Amortization of goodwill and other intangible assets................................ 41,654 42,346
Write-off of acquired in-process technology......................................... -- 7,650
Impairment of intangible and other assets........................................... 10,293 --
Restructuring charges............................................................... 72,013 --
Loss on sale of businesses.......................................................... 2,591 --
--------- ---------
Total operating expenses................................... 263,301 186,382
------- -------
Loss from operations............................ (167,339) (142,870)
--------- ---------
Other income (expense):
Interest income........................................................ 605 4,375
Interest expense....................................................... (7,968) (6,825)
Impairment of investments.............................................. (10,131) --
Other, net............................................................. 275 --
--------- ---------
Total other (expense) income, net.......................... (17,219) (2,450)
-------- -------
Loss before minority interest and extraordinary gains (184,558) (145,320)
--------- ---------
Minority interest...................................................... (131) 1,624
--------- ---------
Loss before extraordinary gains........................................ (184,689) (143,696)
--------- ---------
Extraordinary gains 41,210 --
--------- ---------
Net loss............................................................... $(143,479) $(143,696)
========== ==========
Net loss per share - basic and diluted:
Loss before extraordinary gains........................................ $(2.20) $(2.58)
Extraordinary gains.................................................... 0.49 0.00
--------- ---------
Net loss............................................................... $(1.71) $(2.58)
======= =======
Weighted-average basic and diluted shares outstanding ................. 83,840,853 55,681,116
========== ==========
See accompanying notes to unaudited condensed consolidated financial statements.
4
EASYLINK SERVICES CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(UNAUDITED)
Nine Months Ended September 30,
2001 2000
-------- --------
Cash flows from operating activities:
Net loss................................................................................ $(143,479) $(143,696)
Adjustments to reconcile net loss to net cash used in operating activities:
Non-cash charges related to partner agreements............................. 2,304 10,644
Depreciation and amortization.............................................. 16,837 11,535
Amortization of goodwill and other intangible assets....................... 41,654 42,347
Amortization of domain assets.............................................. 661 1,419
Amortization of deferred compensation...................................... 340 350
Non-cash provision for restructuring and impairments....................... 86,036 --
Provision for doubtful accounts............................................ 4,463 448
Amortization of debt issuance costs........................................ 333 485
Amortization of discount................................................... -- (183)
Write-off of acquired in-process technology................................ -- 7,650
Non-cash advertising....................................................... -- (125)
Issuance of common stock in lieu of compensation........................... -- 1,800
Share of loss from equity investment....................................... -- 72
Loss on the sale of businesses............................................. 2,591 --
Loss on the debt restructuring............................................. 1,117 --
Non-cash interest.......................................................... 755 --
Extraordinary gains........................................................ (41,210) --
Minority interest.......................................................... 131 (1,624)
Changes in operating assets and liabilities, net of effect of acquisitions
and dispositions:
Accounts receivable........................................................ 1,509 (7,143)
Proceeds from sales of marketable securities............................... 22,120 68,166
Purchases of marketable securities......................................... -- (114,189)
Prepaid expenses and other current assets.................................. 2,104 (1,253)
Other assets............................................................... 543 (2,080)
Accounts payable, accrued expenses and other current liabilities........... 5,465 7,404
Deferred revenue........................................................... (500) 1,223
-------- --------
Net cash provided by (used) in operating activities................... 3,774 (116,750)
-------- --------
Cash flows from investing activities:
Purchases of domain assets.............................................................. -- (627)
Proceeds from sale leaseback............................................................ -- 1,265
Purchases of restricted investments..................................................... (4) (695)
Purchases of intangible assets.......................................................... (913) (1,433)
Purchase of investments................................................................. -- (2,900)
Purchases of property and equipment..................................................... (2,534) (10,564)
Proceeds from sale of businesses........................................................ 6,591 --
Cash (paid for)/received from acquisitions, net......................................... (15,308) 1,970
-------- --------
Net cash used in investing activities................................. (12,168) (12,984)
-------- --------
Cash flows from financing activities:
Proceeds from issuance of Class A common stock.......................................... 3,000 --
Proceeds from issuance of Class A common stock in connection with the
exercise and purchase of warrants and options.............................. 10 2,658
Issuance of shares for employee 401(k) plan............................................. 346 386
Proceeds from issuance of senior convertible notes, net................................. 14,110 --
Proceeds from issuance of convertible notes, net........................................ -- 96,050
Payments under capital lease obligations................................................ (4,660) (5,535)
Principal payments of notes payable..................................................... (2,149) (4,537)
Cash received from loan................................................................. 1,065 --
Proceeds from sale of subsidiary interest............................................... -- 16,204
Payments under domain asset purchase obligations........................................ -- (278)
-------- --------
Net cash provided by financing activities............................. 11,722 104,948
-------- --------
Effect of foreign exchange rate changes on cash and cash equivalents.................... 372 (129)
Net increase in cash and cash equivalents............................................... 3,700 (24,915)
Cash and cash equivalents at beginning of the period.................................... 7,409 36,870
-------- --------
Cash and cash equivalents at the end of the period...................................... $11,109 $11,955
======== ========
5
Supplemental disclosure of non-cash information:
During the nine months ended September 30, 2001 and 2000, the Company paid
approximately $6.7 million and $5.7 million, respectively, for interest. Through
the issuance of 2,507,402 shares of Class A common stock, the Company paid
approximately $743,000 in interest for the nine months ended September 30, 2001.
During the nine months ended September 30, 2001, the Company issued 614,749
shares of Class A common stock valued at approximately $655,000 to certain
former employees of Asia.com and India.com as severance payments.
During the nine months ended September 30, 2000, the Company issued 104,347
shares of Class A common stock valued at approximately $1.8 million to an
employee in lieu of compensation.
During the nine months ended September 30, 2001, the Company issued 1,004,230
shares of Class A common stock valued at approximately $585,000 in settlement of
vendor obligations.
During the nine months ended September 30, 2001, the Company issued 317,460
shares of Class A common stock valued at approximately $200,000 as payment
related to the sale of its advertising network.
During the nine months ended September 30, 2001, the Company issued 1,620,833
shares of Class A common stock valued at approximately $1.3 million as payment
for a contingent settlement obligation.
During the nine months ended September 30, 2001, the Company issued 275,000
shares of Class A common stock valued at $189,000 for a settlement obligation
associated with the sale of a business.
Non-cash investing activities:
During the nine months ended September 30, 2001 and 2000, the Company issued
222,222 and 2,162,429 shares of its Class A common stock, respectively, in
connection with certain investments. These transactions resulted in non-cash
investing activities of $285,000 and $17.5 million, respectively (see Note 3).
During the nine months ended September 30, 2001 and 2000, the Company issued
18,962,176 shares and 12,579,770 shares of its Class A common stock in
connection with certain acquisitions. These transactions resulted in non-cash
investing activities of $31.1 million and $218.8 million, respectively (see Note
2).
Non-cash financing activities:
The Company entered into various capital leases for computer equipment. These
capital lease obligations resulted in non-cash financing activities aggregating
$11.4 million for the nine months ended September 30, 2000.
See accompanying notes to unaudited condensed consolidated financial statements.
6
EASYLINK SERVICES CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(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 name change was made to help create a corporate identity tied to the
Company's focus on outsourced messaging services.
EasyLink Services Corporation, ("EasyLink" or the "Company"), formerly Mail.com,
Inc., is a global provider of outsourced messaging services to enterprises and
service providers. Upon the completion of the Company's acquisition of Swift
Telecommunications, Inc. ("Swift Telecommunications") on February 23, 2001, the
Company combined the businesses of Mail.com Business Messaging Services, Swift
Telecommunications and the EasyLink Services business acquired from AT&T Corp.
by Swift Telecommunications. As a result of this combination, EasyLink Services
Corporation offers a range of messaging services to businesses and service
providers, including 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; message delivery services such as
electronic data interchange or "EDI," telex, desktop fax, broadcast and
production messaging services; and professional messaging services and support.
Until March 30, 2001, the Company also operated an advertising network business.
On October 26, 2000, the Company announced its intention to sell this business
in order to focus exclusively on the Company's established outsourced messaging
business. On March 30, 2001, the Company completed the sale of the advertising
network business to Net2Phone, Inc. Included in the sale were the Company's
rights to provide e-mail-based advertising and permission marketing solutions to
advertisers, as well as the Company's rights to provide e-mail services directly
to consumers at the www.mail.com Web site and in partnership with other Web
sites. (See note 2).
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 is the majority owner. In November 2000, the Company
announced its intention to sell all assets not related to its core outsourced
messaging business, including Asia.com, Inc., India.com, Inc. and its portfolio
of domain names. On May 3, 2001, the Company's majority owned subsidiary
Asia.com, Inc. sold its business to an investor group. (See note 2).
(B) Unaudited Interim Condensed Consolidated Financial Information
The accompanying interim condensed consolidated financial statements as of
September 30, 2001 and for the three and nine month periods ended September 30,
2001 and 2000 have been prepared by the Company and are unaudited. In the
opinion of management, the unaudited interim condensed consolidated financial
statements have been prepared on the same basis as the annual consolidated
financial statements and reflect all adjustments, which include only normal
recurring adjustments, necessary to present fairly the consolidated financial
position of EasyLink as of September 30, 2001 and the consolidated results of
operations and cash flows for the interim periods ended September 30, 2001 and
2000. The results of operations for any interim period are not necessarily
indicative of the results of operations for any other future interim period or
for a full fiscal year. The condensed consolidated balance sheet at December 31,
2000 has been derived from audited consolidated financial statements at that
date.
Certain information and note disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted pursuant to the Securities and Exchange
Commission's rules and regulations. It is suggested that these unaudited interim
condensed consolidated financial statements be read in conjunction with the
Company's audited consolidated financial statements and notes thereto for the
year ended December 31, 2000 as included in the Company's Form 10-K filed with
the Securities and Exchange Commission on April 2, 2001.
The Company's December 31, 2000 consolidated financial statements have been
prepared on a going concern basis. The December 31, 2000 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 the Company be unable to continue as
a going concern.
(C) 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 collectiblility of accounts receivable, the
realization of goodwill and other intangibles, accruals and other factors.
Actual results could differ from those estimates.
(D) Principles of Consolidation
The consolidated financial statements include the accounts of EasyLink and its
subsidiaries from the dates of acquisition. WORLD.com, a wholly owned
subsidiary, along with EasyLink, owns 92% of Asia.com, Inc. (whose business was
sold on May 3, 2001) and 89% of India.com, Inc. (see Notes 2 and 12). Swift
Telecommunications Inc., a wholly owned subsidiary of EasyLink, owns 75% of a
company located in Singapore and of a company located in Malaysia. The interests
of shareholders other than EasyLink are recorded as minority interests in the
accompanying condensed consolidated statements of operations and condensed
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 balances and transactions have been eliminated in
consolidation.
7
(E) Domain Assets 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 e-mail address then "mail.com" is the
domain name). Domain assets represent the purchase of domain names and were
amortized using the straight-line method over their economic useful lives, which
had been estimated to be five years. Domain assets were recorded at cost. Domain
assets acquired in exchange for future payment obligations were recorded at the
net present value of such payments using a discount rate of 8.5%. The associated
payment obligation was also recorded at the net present value of the payment
obligations. Payment terms varied from two to seven years. Amortization of
domain assets were charged to cost of revenues if they were being used or were
available for sale and to sales and marketing if designated for new business
development. The Company's policy is to evaluate its domain assets prior to
paying its annual registration renewal fees.
The Company pays domain name registration fees in advance to InterNIC, a
cooperative activity between the US government and Network Solutions, Inc.,
which is the national registry for domain names in the US. Payment of these fees
ensures legal ownership and registration of domain names. The initial
registration period is for a two-year period with subsequent one-year renewal
periods. These costs were deferred and amortized over the related registration
period.
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 2). The net carrying value of these assets at the time of sale was
approximately $2.3 million. As a result of this and eroding market conditions
for domain assets, management determined that the carrying value of many of the
domain names retained by the Company were impaired and recorded an impairment
charge of $3.4 million to reduce the carrying value of these assets to
anticipated values to be received from a third party.
All domain assets are classified as available for sale at September 30, 2001 and
are no longer being amortized.
(F) Revenue Recognition
The Company's business messaging services include 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; message delivery
services such as electronic data interchange or "EDI," telex, desktop fax,
broadcast and production messaging services; and professional messaging services
and support. The Company derives revenues from monthly per-user or per-message
fees for managed e-mail and groupware hosting and virus protection, spam control
and content filtering services; monthly per-message and usage-based charges for
our message delivery 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
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 Emerging Issues
Task Force No. 00-3, Applications of AICPA Statement of Position 97-2 to
Arrangements That Involve the Right to Use Software on Another Entity's
Hardware.
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 its sale on March 30, 2001 (see Note 2), advertising revenues were
derived principally from the sale of banner advertisements. Other advertising
revenue sources included up-front placement fees and promotions. The Company's
advertising products consisted of banner advertisements that appeared on pages
within the Company's properties, promotional sponsorships that were typically
focused on a particular event and merchant buttons on targeted advertising
inventory encouraging users to complete a transaction.
The Company also traded advertisements on its Web properties in exchange for
advertisements on the Internet sites of other companies. Barter revenue, which
is a component of advertising revenue, amounted to $0.6 million and $1 million
for the nine months ended September 30, 2001 and 2000, respectively. For the
nine months ended September 30, 2001 and 2000, barter expenses, which are a
component of cost of revenues, were the same amounts of $0.6 million and $1.0
million, respectively.
Domain development revenues include revenues generated by WORLD.com and consist
primarily of sales of information technology products. Revenue is recognized at
the time of the sale. Revenues are also generated from system integration and
website development for other companies, advertising and commissions for booking
travel arrangements. Revenues are recognized using the percentage of completion
method for system integration projects. Advertising revenue is recognized as the
advertisements are run and commission revenue is recognized on a net basis as
the travel services are performed. On November 2, 2000, the Company announced
its plans to 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, the Company's majority owned
subsidiary Asia.com, Inc. sold its business to an investor group (see note 2).
Deferred revenue represents payments that have been received in advance of
services being performed.
8
(G) 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 September 30, 2001 and December 31, 2000, 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 senior convertible notes payable
approximate their fair values, as interest approximates market rates with the
exception of the Convertible Subordinated Notes payable which had an estimated
fair value of $4.5 million and $13 million at September 30, 2001 and December
31, 2000, respectively, based upon quoted market prices when compared to their
carrying values of $24.1 million and $100 million at September 30, 2001 and
December 31, 2000, respectively.
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.
The Company has not experienced any significant credit loss to date.
No single customer exceeded 10% of either total revenue or accounts receivable
as of and for the three months ended September 30, 2001 or 2000. Revenues from
the Company's five largest customers accounted for an aggregate of 11% and 8%
of the Company's total revenues for the nine months ended September 30, 2001 and
2000, respectively. One customer accounted for 10% of the accounts receivable at
December 31, 2000. Subsequent to December 31, 2000, that customer, Swift
Telecommunications Inc., was acquired by the Company (see Note 2).
(H) 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 share for the periods ended September 30, 2001
and 2000 does not include shares issuable upon exercise of employee stock
options and warrants and upon conversion of convertible notes.
(I) 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 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. 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 (see Notes 2 and 9).
(J) Restructuring Activities
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 (see Note 9).
(K) 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. Net gains and losses from foreign currency transactions
are included in the unaudited condensed consolidated statements of operations
and were not significant.
(L) Recent Accounting Pronouncements
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's adoption
of this statement in the first quarter of 2001 did not have a significant impact
on the Company's financial statements as it does not currently use derivative
instruments or hedging activities.
In July 2001, the FASB issued Statement No. 141, Business Combinations, and
Statement No. 142, Goodwill and Other Intangible Assets. Statement 141 requires
that the purchase method of accounting be used for all business combinations
initiated after September 30, 2001 as well as all purchase method business
combinations completed after September 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 will require 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 will also require 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 SFAS
No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of.
9
The Company is required to adopt 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 September 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 will continue to be amortized prior to the adoption of Statement 142.
Statement 141 will require, 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 will be 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 will be 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 will require 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 will then have 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 would 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 the date of adoption, the Company expects to have unamortized goodwill and
other intangible assets in the amount of $165.5 million, which will be subject
to the transition provisions of Statements 141 and 142. Amortization expense
related to goodwill and other intangible assets was $41.7 million and $60.8
million for the nine months ended September 30, 2001 and year ended December 31,
2000, respectively. Because of the extensive effort needed to comply with
adopting Statements 141 and 142, it is not practicable to reasonably estimate
the impact of adopting these Statements on the Company's financial statements at
the date of this report, including whether any transitional impairment losses
will be required to be recognized as the cumulative effect of a change in
accounting principle.
In August 2001, the Financial Accounting Standards Board issued FASB Statement
No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets
(Statement 144), which supersedes both FASB Statement No. 121, Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of
(Statement 121) and the accounting and reporting provisions of APB Opinion No.
30, Reporting the Results of Operations-Reporting the Effects of Disposal of a
Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring
Events and Transactions (Opinion 30), for the disposal of a segment of a
business (as previously defined in that Opinion). Statement 144 retains the
fundamental provisions in Statement 121 for recognizing and measuring impairment
losses on long-lived assets held for use and long-lived assets to be disposed of
by sale, while also resolving significant implementation issues associated with
Statement 121. For example, Statement 144 provides guidance on how a long-lived
asset that is used as part of a group should be evaluated for impairment,
establishes criteria for when a long-lived asset is held for sale, and
prescribes the accounting for a long-lived asset that will be disposed of other
than by sale. Statement 144 retains the basic provisions of Opinion 30 on how to
present discontinued operations in the income statement but broadens that
presentation to include a component of an entity (rather than a segment of a
business). Unlike Statement 121, an impairment assessment under Statement 144
will never result in a write-down of goodwill. Rather, goodwill is evaluated for
impairment under Statement No. 142, Goodwill and Other Intangible Assets.
The Company is required to adopt Statement 144 no later than the year beginning
after December 15, 2001, and plans to adopt its provisions for the quarter
ending March 31, 2002. Management does not expect the adoption of Statement 144
for long-lived assets held for use to have a material impact on the Company's
financial statements because the impairment assessment under Statement 144 is
largely unchanged from Statement 121. The provisions of the Statement for assets
held for sale or other disposal generally are required to be applied
prospectively after the adoption date to newly initiated disposal activities.
Therefore, management cannot determine the potential effects that adoption of
Statement 144 will have on the Company's financial statements.
(2) ACQUISITIONS AND DISPOSITIONS
Acquisition of 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, payable on December 31,
2001, received approximately $175,000 for transition services 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 FASB 141.
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 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 AT&T note is payable in equal monthly installments over four years
and bears interest at the rate of 10% per annum for the first six months of the
note. Thereafter the rate is adjusted every six months equal to 1% plus the
prime rate as listed in the Wall Street Journal on such date of adjustment. In
the event of non payment after such payment is due, the remainder of the unpaid
balance shall accrue interest at a rate of 3% per annum above the rate
previously described. 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. AT&T has entered into an agreement with the Company to restructure the
note and has granted the Company the right to defer payments under the note
until the earlier of October 31, 2001 or the closing of the restructuring. Upon
the closing of the restructuring, the note will be converted into a package of
securities consisting of a promissory note in the principal amount of $10
million, 10 million shares of Class A common stock and warrants to purchase 10
million shares of Class A common stock. The warrants will 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. See Note (4) Notes Payable and Note (12) Restructuring of Certain
Debt and Lease Obligations 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 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 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 has entered into an
agreement with the Company to restructure the note and has granted the Company
the right to defer payments under the note pending completion of the
restructuring. Upon the closing of the restructuring, the note will be converted
into a package of securities consisting of a senior convertible note in the
principal amount of approximately $2.68 million and having an initial conversion
price equal to $1.00 per share, approximately 2.68 million shares of Class A
common stock and warrants to purchase approximately 2.68 million shares of Class
A common stock. The warrants will 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. See Note (4) Notes
Payable and Note (12) Restructuring of Certain Debt and Lease Obligations for a
description of the restructuring, the senior convertible note and the warrants.
10
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
generated from operations 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
three and nine months ended September 30, 2001 was approximately $2.0 million
and $4.6 million, respectively.
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 letter
agreement 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 $1,294,118
and 2,670,589 shares of the Company's Class A common stock. This transaction is
subject to satisfactory completion of due diligence, execution and delivery of
definitive documentation, receipt of regulatory approvals and other customary
conditions. 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 have agreed to modify the Company's
commitments in respect of TII. In lieu of acquiring TII, the Company has agreed
to purchase certain assets owned by TII and assume certain liabilities not to
exceed $200,000. In addition, in lieu of the above consideration, the Company
has agreed to issue 3 million shares of Class A common stock as the sole
purchase price. This transaction is subject to consummation of the debt
restructuring.
Also in connection with the acquisition of STI, the Company entered into a
letter agreement with the former sole shareholder of STI under which the Company
agreed to acquire the 25% minority interests in the two STI subsidiaries that
operate the businesses conducted under the name "Xtreme" for approximately
$50,000 in cash, promissory notes in the aggregate principal amount of $500,000
and approximately 1.1 million shares of the Company's Class A common stock. This
transaction is subject to satisfactory completion of due diligence, execution
and delivery of definitive documentation, receipt of regulatory approvals and
other customary conditions.
Sale of Advertising Network
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 will receive payments for hosting the consumer mailboxes for a
minimum of one year. During the second quarter of 2001, the Company has
completed the migration of the hosting of these consumer mailboxes to a third
party provider whom we pay for this service. As a result of the sale, the
Company transferred net assets, including certain domain names and partner
agreements (see Notes 1(E) 5, and 12), and liabilities related to the
advertising network to Net2Phone, and recorded a loss on the sale of the
advertising network of $2.3 million.
NetMoves
On February 8, 2000, the Company acquired NetMoves Corporation ("NetMoves") for
approximately $168.3 million including acquisition costs. Pursuant to the
merger, NetMoves stockholders received 0.385336 of a share of EasyLink Class A
common stock for each issued and outstanding share of NetMoves common stock. The
consideration payable by EasyLink in connection with the acquisition of NetMoves
consisted of the following:
6,343,904 shares of EasyLink Class A common stock valued at approximately $145.7
million based upon the average trading price before and after the date the
agreement was signed and announced (December 13, 1999) at $22.96 per share;
The assumption by EasyLink of options to purchase shares of NetMoves' common
stock, par value of $.01 per share, exchanged for options to purchase
approximately 1.0 million shares of EasyLink Class A common stock. The options
were valued at approximately $19.4 million based on the Black-Scholes pricing
model with a 111% volatility factor, a weighted average term of 4.75 years, an
exercise price of $6.69 per share and a fair value of $22.96 per share. Such
options have an aggregate exercise price of approximately $6.6 million.
The assumption by EasyLink of warrants to purchase shares of NetMoves' common
stock, par value of $.01 per share, exchanged for warrants to purchase
approximately 58,000 shares of EasyLink Class A common stock. The warrants were
valued at approximately $1.1 million based on the Black-Scholes pricing model
with a 111% volatility factor, a weighted average term of 10 years, an exercise
price of $8.64 per share and a fair value of $22.96 per share. Such warrants
have an aggregate exercise price of approximately $496,000; and
Acquisition costs of approximately $2.1 million related to the merger.
The acquisition has been accounted for using the purchase method of accounting.
Easylink has allocated a portion of the purchase price to the fair market value
of the acquired assets and assumed liabilities of NetMoves as of February 8,
2000. The excess of the purchase price over the fair market value of the
acquired assets and assumed liabilities of NetMoves has been allocated to
goodwill ($147.1 million), assembled employee workforce ($3.1 million) and
technology ($5.5 million). Goodwill is being amortized over a period of 5 years;
the expected estimated period of benefit, and assembled employee workforce and
technology are being amortized over a period of 3 years, the expected estimated
period of benefit. The fair value of the technology, assembled workforce and
goodwill was determined by management using the excess earnings method, a
risk-adjusted cost approach and the residual method, respectively.
11
In performing the purchase price allocation, the Company considered, among other
factors, the attrition rate of the active users of the technology at the date of
acquisition and the research and development projects in-process at the date of
acquisition. With regard to the in-process research and development projects,
the Company considered, among other factors the stage of development of each
project at the time of acquisition, the importance of each project to the
overall development plan, and the projected incremental cash flows from the
projects when completed and any associated risks. Associated risks included the
inherent difficulties and uncertainties in completing each project and thereby
achieving technological feasibility and risks related to the impact of potential
changes in future target markets.
Approximately $7.7 million of the purchase price of NetMoves was allocated to
in-process technology based upon a management determination that the new
versions of the various fax technologies acquired from NetMoves had not been
developed into the platform required by EasyLink as of the acquisition date. The
fair value of acquired existing and in-process technologies was determined by
management using a risk-adjusted income valuation approach with a discount rate
of approximately 30%. As a result, EasyLink was required to expend significant
capital expenditures to successfully integrate and develop the new versions of
various fax technologies, for which there was considerable risk that such
technologies will not be successfully developed, and if such technologies are
not successfully developed, there will be no alternative use for the
technologies. The various fax technologies are enabling technologies for fax
communications and include message management and reporting. Accordingly, on the
date of acquisition, EasyLink's statements of operations reflected a write-off
of the amount of the purchase price allocated to in-process technology of
approximately $7.7 million.
The Company allocated two projects to in-process technology: FaxMailer and
Production Fax. FaxMailer is an email based Internet fax service that enables
the user to send a fax from their PC to the recipient's fax number. Production
Fax allows users to fax documents using SMTP, SNA, RJE, FTP or other standard
protocols, without any additional software, hardware or changes to existing
systems or networks. The $7.7 million referred to above represents the portion
of purchase price allocated to these two projects. These projects, or in-process
technology, were 83% complete at the date of acquisition. The percentage of
completion was determined by the quotient of the (i) costs incurred to date
divided by (ii) the total development costs for the new technologies.
EasyLink intends to incur in excess of approximately $12.0 million related
primarily to salaries, to develop the in-process technology into commercially
viable products over the next year. Remaining development efforts are focused on
addressing security issues, architecture stability and electronic commerce
capabilities, and completion of these projects will be necessary before revenues
are produced. EasyLink expects to begin to benefit from the purchased in-process
research and development by its fiscal year 2000. If these projects are not
successfully developed, EasyLink may not realize the value assigned to the
in-process research and development projects.
In addition to the rollover of existing options contemplated by the merger
agreement, NetMoves' former President, Chief Executive Officer and Chairman of
the board of directors, as an employee of EasyLink received 231,201 options from
the Company on February 8, 2000 to purchase EasyLink Class A common stock with
an exercise price equal to $17.50 per share, the then fair value of EasyLink's
Class A common stock. All such options were issued immediately after the
NetMoves acquisition.
eLong.com, Inc.
On March 14, 2000, EasyLink 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, EasyLink issued to the former stockholders of eLong.com an aggregate of
3,599,491 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 279,289 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, a weighted average exercise price of $1.24 per share and a weighted
average fair value of $15.69 per share.
The acquisition has been 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 outsourcing business, including its Asia-based businesses.
Additionally, as a result of the continued eroding market conditions in Asia and
the decision to accelerate the divestiture during the first quarter of 2001,
approximately $35 million of goodwill was written-off as it was determined that
the carrying value of the remaining goodwill had been permanently impaired.
After giving effect to the write off, the net goodwill balance was reduced to
$0.
In addition, EasyLink was obligated to issue up to an additional 719,899 shares
of its 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. On May 3, 2001, in connection with the sale of eLong.com., the Company
settled this obligation by issuing 75,000 shares of its Class A common stock
valued at $51,000 to some of the former stockholders of eLong.com. The Company
accounted for this transaction as part of the loss on the sale of eLong.com,
Inc. (see below).
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
242,424 shares of EasyLink Class A common stock for future acquisitions. See
also "Asia.com Acquisitions", below. As a result of the transactions effected
pursuant to the Merger Agreement and the Contribution Agreement, the Company
initially owned shares of Class B common stock of Asia.com representing
approximately 94.1% of the outstanding common stock of Asia.com. Easylink'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.
12
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 200,000 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 completion of the sale, the former shareholders of Lohoo, a company
previously acquired by eLong.com, Inc. brought a claim in China against
eLong.com, Inc. under a contingent payment provision contained in the original
Lohoo acquisition agreement. Under Asia.com's agreement with the buyer of
eLong.com, the Company has agreed to indemnify eLong.com, Inc. for its'
liability, subject to a cap, arising out of this contingent payment obligation.
Under this indemnity obligation, the Company's liability is limited to, at its
option, either 362,319 shares of the Company's Class A common stock (if the
Company elects to pay in shares) or $362,319 in cash (if the Company elects to
pay in cash).
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.com.
Additionally, during the first quarter of 2001, the Company recorded an
additional impairment charge of approximately $35 million to further adjust the
carrying value of eLong.com as noted above. After giving effect to the
impairment charges, the net goodwill balance was reduced to $0. The impairment
results from the deteriorating market conditions in Asia and 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.
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, 1,926,180 shares of EasyLink Class A common stock
valued at approximately $11.6 million and 4,673,448 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.
During the first quarter of 2001, an additional $3.1 million of goodwill was
written off as a restructuring charge as the Company determined that the
carrying value of the goodwill associated with the acquisition focused in the
wireless sector had become permanently impaired. After giving effect to the
write-off, the net goodwill balance was reduced to $0. The impairment charge
resulted from the deteriorating market conditions in Asia and 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.
Under a purchase agreement associated with one of these acquisitions, the
Company agreed to pay a contingent payment of up to $5 million if certain
wireless revenue targets were achieved after the closing. The contingent payment
is payable in EasyLink Class A common stock, cash or, under certain
circumstances, Asia.com Class A common stock. Since Asia.com is no longer
pursuing its wireless business, management does not expect to achieve these
wireless revenue targets and, accordingly, does not expect to issue any
additional consideration.
13
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 was
being amortized over a period of five years, the expected estimated period of
benefit. See Note 12 for information on the resolution of the note payable.
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 was being amortized over a period of five years, the expected
estimated period of benefit. During the second quarter of 2001, management
determined that the value associated with the Mauritius entity had become
impaired, based upon the proceeds, if any, expected upon sale. As a result, the
Company wrote off approximately $3.2 million of goodwill, reducing the balance
to zero. In addition, the carrying value of fixed and other assets was written
down by an additional $1.2 million.
In connection with the Mauritius acquisition, the Company incurred a $1.8
million charge related to the issuance of 104,347 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
in June 2000. See Note 12 - Sale of Mauritius Entity
India Acquisition
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 196,000 shares of EasyLink Class A common stock valued at
approximately $273,000 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 is being amortized over a period of three years, the expected
estimated period of benefit.
TCOM
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 a restructuring
charge of $4.3 million was recorded.
During the second quarter of 2001, the Company settled a contingent obligation
with the former owners of TCOM by issuing 1,620,333 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 impairment charge of approximately $1.3
million during the second quarter of 2001. After giving effect to the write-off,
the net goodwill balance was reduced to $0.
Messaging Acquisitions
During the third quarter of 2000, the Company acquired two companies by issuing
710,195 shares of its 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 a purchase business combination. During the
second quarter of 2001, approximately $826,000 of goodwill was written off as
the 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 associated attributable to
that acquisition was reduced to $0.
Pro Forma Information
The following unaudited pro forma consolidated amounts give effect to the
acquisitions made after January 1, 2000 as if they had occurred on January 1,
2000, by consolidating their results of operations with the results of EasyLink
for the three and nine months ended September 30, 2001 and 2000. 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.
Three Months Ended
September 30,
-------------
2001 2000
---- ----
(In Thousands, Except Per Share Amounts)
Revenues................................................... $37,589 $56,746
Loss before extraordinary gain............................. $(16,586) $(55,005)
Extraordinary gain......................................... $782 $--
Net loss................................................... $(15,804) $(55,005)
Net loss per share - basic and diluted:
Loss before extraordinary gain............................. $(0.18) $(0.69)
Extraordinary gain......................................... $0.01 $--
Net loss................................................... $(0.17) $(0.69)
Weighted average shares used in calculation (1) 92,794 79,750
14
Nine Months Ended
September 30,
-------------
2001 2000
---- ----
(In Thousands, Except Per Share Amounts)
Revenues................................................... $121,409 $179,957
Loss before extraordinary gains............................ $(141,921) $(158,217)
Extraordinary gains........................................ $41,210 --
Net loss................................................... $(100,711) $(158,217)
Net loss per share -basic and diluted:
Loss before extraordinary gains............................ $(1.62) $(2.07)
Extraordinary gains........................................ $0.47 --
Net loss................................................... $(1.15) $(2.07)
Weighted average shares used calculation (1) .............. 87,566 76,302
(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 26,016,831 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 acquisitions from January 1,
2000 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) 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 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 185,686 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.
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 364,431 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 the
first quarter of 2001, the Company recorded an impairment charge of $2.6 million
due to an other-than-temporary decline in the value of this investment. This
amount is included in impairment of investments within other income (expense) in
the March 31, 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 80,083 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 255,049 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 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.
15
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 462,963 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 $9 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 92,593 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 444,444 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 222,222
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 the second quarter of 2001, management
made an assessment of the carrying value of its investment, based upon an
incremental investment 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, EasyLink wrote down the value of its
investment in Bantu by $7.3 million 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.
(4) Notes Payable
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 $18.95 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 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 extraordinary gain on exchange of convertible notes, included
in the 2001 statements of operations.
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
1,420,714 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 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
$1.30 per share. The conversion price is subject to anti-dilution adjustments.
16
$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 $1.75
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 $1.50
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, "Accounting by Debtors
and Creditors for Troubled Debt Restructurings." As a result of these exchanges,
the Company recorded a $40.4 million extraordinary gain on the exchange of
convertible notes during the nine months ended September 30, 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.
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 subsidiaries Mail.com Business Messaging
Services, Inc. and The Allegro Group, 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 $1.00 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.
17
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.
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). See Note 12 -
Restructuring of certain debt and lease obligations.
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 1,250,000 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. See also
Note (12) - Zones, Inc. Promissory Note.
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 is payable on December 31, 2001.
Restructuring of Certain Debt and Lease Obligations
The Company announced on September 25, 2001 that it had entered into agreements
with AT&T Corp., George Abi Zeid (the former sole shareholder of Swift
Telecommunications, Inc.) and equipment lessors to restructure outstanding debt
and equipment lease obligations. The agreements related to an aggregate of
approximately $63 million of debt and capital lease obligations. Upon completion
of this restructuring, the Company would eliminate a principal amount of
approximately $43 million. As of September 30, 2001, closing of the debt
restructuring was subject to certain conditions, including completing a $10
million financing.
Under the terms of the restructuring, the Company will exchange 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, 19.7 million shares of
Class A Common Stock and warrants to purchase 18.0 million shares of Class A
Common Stock. In addition, the Company has agreed to purchase certain leased
equipment having an original equipment cost of $22.5 million for an aggregate
purchase price of up to approximately $3.9 million.
The restructure notes will bear interest at a rate of 12% per annum and mature
five years from the date of the restructuring. $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 $1.00 per
share, subject to adjustment in certain events after the closing. The Company
will not be required to make scheduled principal payments on any of the notes
until two years after the dates of issuance. 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 anytime for cash.
The warrants will allow the holders to purchase shares of Class A Common Stock
of the Company at an exercise price equal to the average of the closing prices
of EasyLink's Class A Common Stock over the 30 trading days ending two days
before the closing of the restructuring. The number of shares issuable upon
exercise and the exercise price of the warrants are subject to adjustment in
certain events after the closing. The warrants are exercisable for ten years
after the date of the grant.
The Company has agreed to file a registration statement with the SEC covering
the shares issuable at the closing of the restructuring, the shares issuable
upon conversion of the convertible notes and the shares issuable upon exercise
of the warrants.
Pending the completion of this restructuring, creditors have agreed to defer all
payments under the obligations that are the subject of the restructuring until
October 31, 2001 unless extended. Also pending completion of the restructuring,
the Company has issued approximately $16.3 million of interim notes in exchange
for present and future lease obligations in the amount of approximately $15.1
million. The interim notes bear interest at the rate of 12% per annum, may be
declared due and payable by the holder after October 31, 2001 unless extended
and will be exchanged upon completion of the restructuring for a portion of the
shares, restructure notes and warrants to be issued in the restructuring.
The completion of the debt restructuring is subject to certain conditions,
including completing a $10 million financing on or before October 31, 2001
unless extended, compliance with applicable NASDAQ stock market rules and
entering into definitive agreements with the creditors holding the obligations
that are subject to this restructuring. As of September 30, 2001, the Company
had entered into definitive agreements with creditors representing approximately
$50.3 million of the approximately $63 million of debt and had entered into
agreements in principle with the balance of the creditors.
See also Note 12 - Restructuring of certain debt and lease obligations
Notes payable include the following, in thousands
September 30, 2001 December 31, 2000
------------------ -----------------
1997 16% Convertible Note due December 2001 $25 $91
1998 Floating rate note payable due March 2001 - 50
1998 9.25% Note payable due March 2001 - 15
1998 16% Note payable due June 2002 379 497
1999 16% Note payable due December 2003 428 529
2000 7% Note payable due March 2001 800 1,000
2000 7% Convertible Subordinated Notes due February 2005 24,095 100,000
2001 10% Senior Convertible Notes due January 2006 44,624 --
2001 10% Note due February 2005 33,542 --
2001 Non interest bearing note payable to former shareholder of STI 7,886 --
2001 12% Interim Notes 16,264 --
2001 Non Interest bearing note payable to GN Store Nord A/S due December 2001 908 --
--- --
Total Notes Payable 128,951 102,182
Less current portion 35,411 1,861
------ -----
Non current portion $93,540 $100,321
======= ========
(5) Partner Agreements
The Company had entered into many partner agreements that were associated with
the Company's advertising network. Included in these agreements were percentage
of revenue sharing agreements, miscellaneous fees and other customer acquisition
costs with EasyLink partners. The revenue sharing agreements varied for each
party but typically were based on selected revenues, as defined, or on a per
sign-up basis.
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 253,532 shares of Class A common stock upon the
commencement of the contract at $3.50 per share, the fair market value of
EasyLink's common stock on the date of grant, or $887,000. CNN also had the
right to receive a portion of the Company's selected revenues under the
agreement, as defined. The value of the stock issuance was recorded in the
balance sheet as partner advances and was amortized ratably to amortization
expense over the contract term. The launch of the services coincided with the
contract date. The Company recorded approximately $49,000 and $271,000 of
amortization expense for the three and nine-month periods ended September 30,
2000.
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,
2,368,907 shares of Class A common stock at a value of $7.00 per share in the
aggregate to CNET and Snap and 210,000 shares of Class A common stock at a value
of $7.00 per share to NBC Multimedia. The Company capitalized $18 million in
connection with the issuance of these shares and has ratably amortized 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 of
amortization expense for the three months ended September 30, 2000 and $2.3
million and $6.9 million for the nine months ended September 30, 2001 and 2000,
respectively. The remaining $1.5 million of unamortized costs were written off
as a part of the loss on the sale of the advertising network during the first
quarter of 2001.
(6) Leases
Approximately $21 million of our outstanding obligations to lessors have been
classified as current liabilities, which includes $16.3 million that are
included as part of the interim notes. The holders of these obligations have
entered into agreements with the Company to restructure these obligations and
have granted the Company the right to defer payments until the earlier of
October 31, 2001, unless extended, or the closing of the restructuring. Upon the
closing of the restructuring, these obligations will be converted into a package
of securities consisting of senior convertible notes and other obligations in
the aggregate principal amount of approximately $7.5 million, approximately 7
million shares of Class A common stock and warrants to purchase approximately
5.3 million shares of Class A common stock. In addition, the Company has agreed
to purchase certain leased equipment having an original equipment cost of $22.5
million for an aggregate purchase price of up to approximately $3.9 million.
The warrants will 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. See Note (4) Notes Payable and
Note (12) Restructuring of Certain Debt and Lease Obligations for a description
of the restructuring, the senior convertible note and the warrants. If the
restructuring is successfully completed, any remaining portion of these
obligations that are due and payable more than 12 months after the closing of
the restructuring will be reclassified from short-term to long-term liabilities.
(7) Warrants and Options
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 did not enter 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, EasyLink issued warrants to
purchase 1.0 million shares of Class A common stock at $11.00 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 the first quarter
of 2000.
During the quarter ended September 30, 2001, the Company granted to its
employees and directors under its stock option plans a total of 7,018,479
options to purchase shares of Class A common stock with an average exercise
price of $0.24 per share. As of September 30, 2001, the Company had a total of
18,495,418 options outstanding with an average exercise price of $1.40 per
share.
In connection with the Company's proposed debt restructuring, the Company has
agreed to issue upon the closing of the restructuring, warrants to purchase 18
million shares of Class A common stock. The warrants will have an 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. See Note (4) Notes Payable and Note (12) Restructuring of Certain
Debt and Lease Obligations for a description of the restructuring and the
warrants.
(8) Business Segments
The Company's two business segments are Messaging and Domain Development, the
latter being attributable to the formation of WORLD.com. The following table
presents summarized financial information related to the business segments, in
thousands:
Three Months Ended September 30,
--------------------------------
2001 2000
---- ----
Revenue:
Messaging.................................................... $36,548 $15,078
Domain development........................................... 1,041 3,460
----- -----
Total revenue........................................... $37,589 $18,538
======= =======
Cost of revenues:
Total Messaging.............................................. $19,294 $13,945
Domain development........................................... 1,086 2,630
----- -----
Total cost of revenue................................... $20,380 $16,575
======= =======
Operating expenses, excluding cost of revenue
Messaging............................................... $30,567 $39,888
Domain development...................................... 1,111 14,586
----- ------
Total operating expenses, excluding cost of revenue $31,678 $54,474
======= =======
Nine Months Ended September 30,
-------------------------------
2001 2000
---- ----
Revenue:
Messaging.................................................... $90,128 $38,621
Domain development........................................... 5,834 4,891
----- -----
Total revenue........................................... $95,962 $43,512
======= =======
Cost of revenues:
Total Messaging.............................................. $59,550 $36,222
Domain development........................................... 6,146 4,108
----- -----
Total cost of revenue................................... $65,696 $40,330
======= =======
Operating expenses, excluding cost of revenue
Messaging............................................... $96,460 $115,893
Domain development...................................... 101,145 30,159
------- ------
Total operating expenses, excluding cost of revenue $197,605 $146,052
======== ========
19
The following table reconciles total assets for business segments to
consolidated assets, in thousands:
September 30, December 31,
2001 2000
---- ----
Identifiable Assets
Messaging.................................................. $253,522 $252,575
Domain development......................................... 1,810 74,491
Inter-segment eliminations ................................ 3,004 3,195
----- -----
Consolidated assets........................................ $258,336 $330,261
======== ========
The following table presents certain segment information, in thousands:
Domain
Messaging Development Total
Three months ended September 30, 2001
Restructuring charges.............................. $-- $-- $--
Impairment of intangibles and other assets......... $50 $-- $50
Loss on sale of businesses ........................ $-- $-- $--
Domain
Messaging Development Total
Nine months ended September 30, 2001
Restructuring charges.............................. $25,338 $46,675 $72,013
Impairment of intangibles and other assets......... $ 2,199 $ 8,094 $10,293
Loss on sale of businesses......................... $ 2,327 $ 264 $ 2,591
(9) Restructuring Charges
During the nine months ended September 30, 2001, a restructuring charge of $72.0
million was recorded by the Company in accordance with the provisions of EITF
94-3, and Staff Accounting Bulletin 100. The Company's restructuring initiatives
are related to our strategic decisions to exit the consumer messaging business
and WORLD.com business and to focus on the Company's outsourced messaging
business.
During the first nine months of 2001, the Company's restructuring program
included an incremental reduction in the workforce of approximately 150
employees. In addition, asset disposals of $68.6 million reflect write-downs of
goodwill and other intangible assets of $44.5 million primarily in connection
with management's decision to sell its WORLD.com properties, the majority of
which related to its Asian portal businesses (see Note 2), and a write-down of
$24.1 million of excess fixed assets and other assets to their net realizable
values.
The following sets forth the activity in the Company's restructuring reserve (in
thousands):
Beginning Current year- Current year- Ending
balance provision utilization balance
------- --------- ----------- -------
Employee termination
benefits......................... $559 $2,378 $2,448 $488
Lease abandonments .............. 3,136 1,034 3,543 628
Asset disposals.................. -- 68,601 68,601 --
Other exit costs................. 353 2 337 19
--- - --- --
$4,048 $72,015 $74,929 $1,134
====== ======= ======= ======
(10) India.com Financing
During the third quarter of 2000, India.com, Inc., a then wholly-owned
subsidiary of EasyLink, issued 13,657,692 shares of Series A convertible
preferred stock to private investors valued at $14.2 million. These shares are
convertible into India.com Class A common stock at the initial purchase price of
the preferred shares, subject to certain anti-dilution adjustments. Under the
terms of an exchange agreement entered into at the time of the financing, 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 $4.50) and $6.00. This exchange right has since been 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 thereby became obligated to issue to India.com bridge
notes evidencing these borrowings (the "Bridge Notes"). Under the Bridge Funding
Agreement, the Company committed to issue to India.com warrants to purchase
200,000 shares of EasyLink's Class A common stock at an exercise price of $1.30
per share in consideration of the commitment under the Bridge Funding Agreement.
In addition, India.com was entitled to receive warrants to purchase an
additional 160,000 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 was obligated to issue
an additional 800,000 warrants at exercise prices ranging from $0.62 to $1.40
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 $4.50 per share to $3.00 per share
immediately upon execution and delivery of the Bridge Funding Agreement and was
subject to further reduction to $1.25 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, the holders of 99.3% 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 $1.00 and a cap of $3.00 and subject to adjustment in certain
circumstances. Based on the average of the closing prices of the Company's
stock, the exchange price was $1.00 per share and 14,200,000 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 100,000 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 1 million shares of the Company's Class A common stock
issued to India.com.
The consummation of the above exchange on or after September 13, 2001 is subject
to compliance with NASDAQ requirements. See also Note 12 - Closing of India.com,
Inc. Preferred Stock Exchange.
(11) Private Placement of Common Stock
On March 20, 2001, the Company completed a private placement of 3,000,000 shares
of Class A common stock (the "Common Shares") to 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 EasyLink 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 EasyLink convertible notes,
EasyLink is obligated to issue an additional 1,000,000 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 $10 per share for at least five consecutive
trading days during 2001.
(12) Subsequent Events
Issuance of Senior Convertible Notes
On October 11, 2001, the Company issued $1.3 million of 10% senior convertible
notes due January 8, 2006 to private investors. The notes are convertible into
shares of Class A common stock at an initial conversion price of $0.25 per
share, subject to adjustment in certain events. The notes have terms and
conditions otherwise similar to the 10% senior convertible notes issued on March
19, 2001. See Note (4) Notes Payable.
Closing of 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 14.2
million shares of the Company's Class A common stock. See Note (10) India.com
Financing.
Zones, Inc. Promissory Note
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. See Note (4) Zones, Inc.
Promissory Note. 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
1,033,592. The shares must be issued on or before November 30, 2001.
Sale of Mauritius Entity
On October 31, 2001, the Company's India.com, Inc. subsidiary sold its Multiple
Zones Mauritius Prvt. Ltd. subsidiary. The Company received a promissory note in
the principal amount of $335,000 payable in equal quarterly installments of
$27,917 on the last business day of each March, June, September and December
commencing March 2003. The Company does not estimate a significant gain or loss
on the transaction.
Agreement to Sell Portal Operations of India.com, Inc.
The Company entered into an agreement dated as of October 26, 2001 to sell the
portal operations of its India.com, Inc. subsidiary. The closing of the sale is
subject to receipt of applicable governmental approvals in India. Upon
consummation of the sale, the Company would receive an aggregate of up to $8
million consisting of (i) $0.25 million in cash payable at the closing, (ii) a
promissory note in the principal amount of up to $6.75 million, and (iii) shares
of capital stock of the buyer representing 4% of the fully diluted capital stock
of the Buyer having a value of $1 million. The note is payable in installments
of $0.5 million on October 26, 2002, $1 million on April 26, 2003, $5.25 million
on October 26, 2003. The installments payable on the note may be satisfied at
various discounts if paid by dates specified in the note. If all discounts are
fully utilized, a minimum of $3.37 million would be payable on the note. The
buyer has an option to purchase the buyer shares issuable as part of the
purchase price for $1 million at any time on or before the second anniversary of
the closing date. The Company does not anticipate a significant gain or loss on
the transaction.
Restructuring of Certain Debt and Lease Obligations
The Company's creditors and lessors participating in its proposed debt
restructuring have agreed to extend the date for completion of the debt
restructuring to November 30, 2001. The Company has received sufficient
financing commitments in order to complete the debt restructuring. The Company
has secured commitments for approximately $10 million of financing. As of
November 14, 2001, the maximum aggregate number of shares issuable pursuant to
these commitments is approximately 28 million shares of Class A common stock.
Completion of the financing is subject to execution and delivery of definitive
agreements and completion of the debt restructuring.
Approximately $5.7 million of this financing is represented by the investment of
cash in exchange for a number of shares of Class A common stock based on the
average of the closing prices of EasyLink's Class A common stock for the 10
consecutive trading days prior to the closing. If the average of the closing
prices of EasyLink's Class A common stock for the 10 consecutive trading days
prior to January 2, 2002 is less than $1.60 per share, then EasyLink will issue
additional shares to the purchasers such that the shares issued at the closing
plus the shares issued pursuant to any adjustment on January 2, 2001 is
approximately 14.25 million shares of Class A common stock. Executives of
EasyLink may also participate in the financing and purchase up to 3 million
additional shares of Class A common stock on the same terms and conditions as
the other purchasers of shares of Class A common stock. Approximately $1.3
million of this financing is represented by the investment on October 11, 2001
of cash in exchange for senior convertible notes that are convertible into
approximately 5.2 million shares of Class A common stock. Approximately $3.0
million of this financing is represented by the exchange of $1.4 million of cash
equipment purchase obligations owed to lessors and $1.6 million of other cash
obligations owed to AT&T for an aggregate of 8.2 million shares of Class A
common stock.
Termination of Net2Phone Agreement
On November 14, 2001, the Company entered into an agreement with Net2Phone
terminating the hosting agreement as of September 30,2001. See also note (2).
Item 2: Management's Discussion and Analysis of Financial Condition and Results
of Operations
We make forward-looking statements within the "safe harbor" provisions of the
Private Securities Litigation Reform Act of 1995 throughout this report. These
statements relate to our future plans, objectives, expectations and intentions.
These statements may be identified by the use of words such as "expects,"
"anticipates," "intends," "believes," "estimates," "plans" and similar
expressions. Our actual results could differ materially from those discussed in
these statements. Factors that could contribute to such differences include, but
are not limited to, those discussed in the "Risk Factors" section of this
report. EasyLink Services Corporation undertakes no obligation to update
publicly any forward-looking statements for any reason even if new information
becomes available or other events occur in the future.
Unless otherwise indicated or the context otherwise requires, all references to
"we," "us," "our" and similar terms refer to EasyLink Services Corporation and
its direct and indirect subsidiaries.
Overview
On April 2, 2001, we changed our name to EasyLink Services Corporation. The name
change was made to help create a corporate identity tied to our focus on
outsourced messaging services.
EasyLink Services Corporation, formerly Mail.com, Inc., is a leading global
provider of outsourced messaging services to enterprises and service providers.
Upon the completion of our acquisition of Swift Telecommunications, Inc. on
February 23, 2001, we combined the businesses of Mail.com Business Messaging
Services, Swift Telecommunications and the Easylink Services business acquired
from AT&T Corp. by Swift Telecommunications. As a result of this combination,
Easylink Services Corporation offers a comprehensive portfolio of messaging
services to thousands of business customers worldwide. We offer a broad range of
messaging services to businesses and service providers, including managed e-mail
and groupware hosting services; services that protect corporate e-mail systems
such as virus protection, spam control and content filtering services; message
delivery services such as electronic data interchange or "EDI," telex, desktop
fax, broadcast and production messaging services; and professional messaging
services and support.
We derive revenues from monthly per-user or per-message fees for managed e-mail
and groupware hosting and virus protection, spam control and content filtering
services; monthly per-message and usage-based charges for our message delivery
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.
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, 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 is streamlining
the organization, taking advantage of lower cost areas and further integrating
its technological and operational infrastructures. On March 30, 2001, we
completed the sale of our advertising network and consumer e-mail business to
Net2Phone for $3 million in cash at the closing and on April 13, 2001, received
an additional $500,000 based upon the achievement of certain milestones by
EasyLink. In connection with the sale, we entered into a hosting agreement under
which we will 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 e-mailboxes to a third party provider
whom we pay for this service. On November 14, 2001, the Company entered into an
agreement terminating the hosting agreement as of September 30, 2001. See also
Note (2).
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 serve the worldwide business-to-business and
business-to-consumer marketplace. Through its subsidiaries, WORLD.com generates
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 will 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, the Company's majority owned subsidiary Asia.com, Inc. sold its business
to an investor group. On October 31, 2001, the Company's India.com, Inc.
subsidiary sold its Multiple Zones Mauritius Prvt. Ltd. subsidiary. The Company
also entered into an agreement dated as of October 26, 2001 to sell the portal
operations of its India.com, Inc. subsidiary. See Notes 1, 2 and 12 to our
unaudited condensed consolidated financial statements for additional
information.
23
For the quarter ended September 30, 2001, total revenues were $37.6 million
compared to $18.5 million for the quarter ended September 30, 2000. Net loss was
$15.8 million for the quarter ended September 30, 2001 as compared to $53.3
million for the quarter ended September 30, 2000. For the nine months ended
September 30, 2001, total revenues were $96.0 million compared to $43.5 million
for the nine months ended September 30, 2000. Net loss was $143.5 million for
the nine months ended September 30, 2001 as compared to $143.7 million for the
nine months ended September 30, 2000.
During the first nine months of 2001, we generated approximately 92% of our
revenues from business messaging services and approximately 2% of our revenue
from the advertising network business. We also generated approximately 6% of our
revenues from the sales of information technology products and the provision of
local content and other Internet services associated with WORLD.com. During the
first nine months of 2000, we generated approximately 50% of our revenues from
business messaging services, approximately 38% of our revenue from the
advertising network business and approximately 12% of our revenues from the
sales of information technology products and the provision of local content and
other Internet services associated with WORLD.com.
For the nine months ended September 30, 2001 and 2000, approximately $90 million
and $22 million, respectively, of our revenue was generated from companies we
acquired since January 1, 2000. As indicated in Note 1 of the notes to our
unaudited condensed consolidated financial statements, in the future, our focus
is centered exclusively on the outsourced business messaging market.
Prior to March 30, 2001, advertising revenues were derived principally from the
sale of banner advertisements. Other advertising revenue sources included
up-front placement fees and promotions. The Company's advertising products
consisted of banner advertisements that appeared on pages within the Company's
properties, promotional sponsorships that were typically focused on a particular
event and merchant buttons on targeted advertising inventory encouraging users
to complete a transaction.
The Company also traded advertisements on its Web properties in exchange for
advertisements on the Internet sites of other companies. Barter revenue, which
is a component of advertising revenue, amounted to $0.6 million and $1.0 million
for the nine months ended September 30, 2001 and 2000, respectively. For the
nine months ended September 30, 2001 and 2000, barter expenses, which are a
component of cost of revenues, were the same $0.6 million and $1.0 million,
respectively.
Domain development revenues include revenues generated by WORLD.com and consist
primarily of sales of information technology products. Revenues are also
generated from system integration and website development, advertising, and
commissions from booking travel arrangements. Revenues for the quarter ended
September 30, 2001 were $1.0 million and compared to $3.5 million in the quarter
ended September 30, 2000. For the nine months ended September 30, 2001 domain
development revenues were $5.8 million as compared to $4.9 million for the prior
year period. On May 3, 2001, the Company's majority owned subsidiary Asia.com,
Inc. sold its business to an investor group for $1.5 million in cash and assumed
$1.5 million of liabilities.
Although we have experienced substantial growth in revenues in recent periods,
we have incurred substantial operating losses since inception and will continue
to incur substantial losses for the foreseeable future. As of September 30,
2001, we had an accumulated deficit of approximately $450.7 million.
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. We do not believe that our historical growth
rates are indicative of future results.
Our prospects should be considered in light of risks, expenses and difficulties
encountered by companies in the early stages of development, particularly
companies in the rapidly evolving Internet market. See "Risk Factors That May
Affect Future Results".
STOCK AND WARRANT ISSUANCES
During the nine months ended September 30, 2001, the Company issued 614,749
shares of Class A common stock to certain former employees of Asia.com and
India.com as severance payments valued at approximately $655,000.
During the quarter ended June 30, 2001 we issued 317,460 shares and 604,230
shares, respectively of our Class A common stock to an investment bank as
payment for services rendered in connection with the sale of our advertising
network and to a vendor as payment for services.
During the quarter ended September 30, 2001 we issued 2,945,327 shares of Class
A common stock in association with interest payment on our Senior Convertible
Notes and subordinated debentures. See Note (4)
Under an agreement with CNN entered into August 1998, we issued 253,532 shares
of our Class A common stock upon execution of a contract in August 1998. We
agreed to issue the shares in anticipation of CNN's fulfillment of promotional
obligations under the contract. We capitalized approximately $887,000 as a
partner advance, the market value of the stock we issued and then amortized that
amount over the length of the contract. During the three and nine month periods
ended September 30, 2000 we recorded approximately $49,000 and $271,000,
respectively, of amortization expense for this agreement and this amount is
included in sales and marketing expenses.
24
Prior to May 1, 1999, we were required to issue to CNET, Snap and NBC Multimedia
shares of our Class A common stock for each member who registers at their sites.
On May 1, 1999, we entered into an agreement to settle in full its contingent
obligation to issue shares of our Class A common stock to CNET, Snap and NBC
Multimedia as described above. Pursuant to this agreement, we issued upon the
closing of our initial public offering in June 1999, 2,368,907 shares of Class A
common stock at a value of $7.00 per share in the aggregate to CNET and Snap and
210,000 shares of Class A common stock at a value of $7.00 per share to NBC
Multimedia. We capitalized $18 million in connection with the issuance of these
shares and are ratably amortizing the amount over the period from the closing of
the initial public offering (June 23, 1999) through May 2001. We recorded
approximately $2.3 million of amortization expense for the three months ended
September 30, 2000. For the nine months ended September 30, 2001 and 2000, we
recorded approximately $2.3 million and $6.9 million of amortization expense.
The remaining $1.5 million of unamortized costs were written off as a part of
the loss on the sale of the advertising network.
Under a letter agreement and interim agreement dated May 26, 1999 and July 26,
1999, respectively, AT&T Corp. ("AT&T") and we agreed to negotiate in good faith
to complete definitive agreements to establish a strategic relationship. We have
not entered into a definitive agreement to establish the proposed strategic
relationship, and, effective March 30, 2000, the letter agreement and the
Interim Agreement were terminated. Under the May 26, 1999 letter agreement, we
issued warrants to purchase 1.0 million shares of Class A common stock at $11.00
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.
We 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, the remaining
unamortized portion of deferred costs of $3.3 million was expensed during the
first quarter of 2000.
During the nine months ended September 30, 2000, the Company issued 104,347
shares of Class A common stock valued at approximately $1.8 million to an
employee in lieu of compensation.
ACQUISITIONS, INVESTMENTS AND DIVESTITURES
During 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, payable on December 31,
2001, received approximately $175,000 for transition services 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 FASB 141.
On October 31, 2001, the Company's India.com, Inc. subsidiary sold its Multiple
Zones Mauritius Prvt. Ltd. subsidiary. The Company also entered into an
agreement dated as of October 26, 2001 to sell the portal operations of its
India.com, Inc. subsidiary. See Notes 1, 2 and 12 to our unaudited condensed
consolidated financial statements for additional information.
On February 23, 2001, we acquired Swift Telecommunications, Inc., ("STI"). In
January 2001, STI acquired the EasyLink Services business ("EasyLink Services")
from AT&T Corp. STI, together with its newly acquired EasyLink Services
business, is a global provider of messaging services such as telex, fax,
electronic data interchange and e-mail.
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 the Company's Class A common
stock to be 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 for the first six months of the note. Thereafter the rate is adjusted
every six months equal to 1% plus the prime rate as listed in the Wall Street
Journal on such date of adjustment. In the event of a non payment after such
payment is due, the remainder of the unpaid balance shall accrue interest at a
rate of 3% per annum above the rate previously described. 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 our
ability to incur additional indebtedness and to incur additional liens on the
STI and EasyLink assets. AT&T has entered into an agreement with the Company to
restructure the note and has granted the Company the right to defer payments
under the note until the earlier of October 31, 2001 or the closing of the
restructuring. Upon the closing of the restructuring, the note will be converted
into a package of securities consisting of a promissory note in the principal
amount of $10 million, 10 million shares of Class A common stock and warrants to
purchase 10 million shares of Class A common stock. The warrants will 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. See Note (4) Notes Payable and Note (12) Restructuring of
Certain Debt and Lease Obligations for a description of the restructuring, the
promissory note and the warrants. See note (2) to the unaudited condensed
consolidated financial statements for additional information.
Upon the closing of the acquisition of STI, we paid to the sole shareholder of
STI $835,294 in cash and issued an unsecured note for approximately $9.2 million
and 18,766,176 shares of the Company's Class A common stock valued at
approximately $30.8 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
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 will be non-interest bearing unless we fail to make
a required payment within 30 days after the due date therefore. Thereafter, the
note will bear interest at the rate of 1% per month. The note also contains
certain customary events of default. The holder of the note has entered into an
agreement with the Company to restructure the note and has granted the Company
the right to defer payments under the note pending completion of the
restructuring. Upon the closing of the restructuring, the note will be converted
into a package of securities consisting of a senior convertible note in the
principal amount of approximately $2.68 million and having an initial conversion
price equal to $1.00 per share, approximately 2.68 million shares of Class A
common stock and warrants to purchase approximately 2.68 million shares of Class
A common stock. The warrants will 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. See Note (4) Notes
Payable and Note (12) Restructuring of Certain Debt and Lease Obligations for a
description of the restructuring, the senior convertible note and the warrants.
In connection with the acquisition of STI, the Company entered into a letter
agreement 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 $1,294,118
and 2,670,589 shares of the Company's Class A common stock. This transaction is
subject to satisfactory completion of due diligence, execution and delivery of
definitive documentation, receipt of regulatory approvals and other customary
conditions. 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 have agreed to modify the Company's
commitments in respect of TII. In lieu of acquiring TII, the Company has agreed
to purchase certain assets owned by TII and assume certain liabilities not to
exceed $200,000. In addition, in lieu of the above consideration, the Company
has agreed to issue 3 million shares of Class A common stock as the sole
purchase price. This transaction is subject to consummation of the debt
restructuring.
Also in connection with the acquisition of STI, the Company entered into a
letter agreement with the former sole shareholder of STI under which the Company
agreed to acquire the 25% minority interests in the two STI subsidiaries that
operate the businesses conducted under the name "Xtreme" for approximately
$50,000 in cash, promissory notes in the aggregate principal amount of $500,000
and approximately 1.1 million shares of the Company's Class A common stock. This
transaction is subject to satisfactory completion of due diligence, execution
and delivery of definitive documentation, receipt of regulatory approvals and
other customary conditions.
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 196,000 shares of EasyLink Class A common stock valued at approximately
$273,000, based upon our average trading price surrounding the date of
acquisition. 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 is being amortized over a period of three years, the expected
period of benefit. The acquisition was accounted for as a purchase business
combination.
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 6,343,904 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 962,443
shares and 57,343 shares respectively, of our Class A common stock at weighted
average exercise prices of $6.69 and $8.64, respectively. The options and
warrants were valued at an aggregate of approximately $20.5 million.
25
NetMoves (now named 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.
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 3,599,491 shares
of EasyLink 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 279,289 shares of EasyLink 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 its core outsourcing business,
including its Asia-based businesses. Additionally, as a result of the continued
eroding market conditions in Asia and the decision to accelerate the divestiture
during the first quarter of 2001, approximately $35 million of goodwill was
written-off as it was determined that the carrying vale of the remaining
goodwill had been permanently impaired. After giving effect to the write off,
the net goodwill balance was reduced to $0. 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 719,899 shares of
EasyLink Class A common stock in the aggregate to the former stockholders of
eLong.com if EasyLink or Asia.com acquires 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. On May 3, 2001, in connection with the sale of eLong.com, we settled this
obligation by issuing 75,000 shares of our Class A common stock valued at
$51,000 to the former stockholders of eLong.com. We accounted for this
transaction as part of the loss on the sale of Asia.com.
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
242,424 shares of EasyLink Class A common stock for future acquisitions. 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. 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.
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 EasyLink. In addition the Company issued 200,000 shares of its Class A
common stock valued at approximately $138,000 to certain former shareholders in
exchange for the cancellation of options issued upon the purchase of eLong.com,
as described above. We 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 approximately $264,000.
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 a restructuring
charge of $4.3 million was recorded. During the second quarter of 2001, we
settled a contingent obligation with the former owners of TCOM by issuing
1,620,333 shares of its Class A common stock valued at approximately $1.3
million and paying cash of $300,000. We 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 impairment
charge of approximately $1.3 million during the second quarter of 2001. After
giving effect to the write-off, the net goodwill balance was reduced to $0.
On March 16, 2000, in exchange for $2 million in cash and 185,686 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. This amount is included in 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.
26
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, the Company 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
104,347 shares of Class A common stock, as compensation for services performed,
and in June 2000, we paid $200,000 cash and an additional $200,000 payable in
our Class A common stock as compensation for employees. During the second
quarter of 2001, management determined that the value of the goodwill associated
with the Mauritius entity had become impaired, based upon the expected proceeds
of the sale of India.com. As a result the Company wrote off approximately $3.2
million of goodwill reducing the balance to zero. In addition, the carrying
value of fixed and other assets was written down by an additional $1.2 million
On October 31, 2001, we sold the Mauritius entity for a promissory note in the
principal amount of $335,000. The Company does not estimate a significant gain
or loss on the transaction.
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 462,963 shares of our 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 our 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 $9 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 92,593 shares of the Company's 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 444,444 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 222,222 shares of our 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 the second quarter of 2001, management made an assessment of
the carrying value of its investment, based upon an incremental investment 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 its investment in Bantu by $7.3
million as we determined that the decline in its value was other-than-temporary.
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, 1,926,180 shares of our Class A common stock valued
at approximately $11.6 million and 4,673,448 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 its core outsourcing business, including its
Asia-based businesses. During the first quarter of 2001, an additional $3.1
million was written off as we determined that the carrying value of the goodwill
associated with the acquisition focused on the wireless sector had become
permanently impaired. After giving effect to the write-off, the net goodwill
balance was reduced to $0. Please 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 shares of our Class A common stock, cash or, under certain
circumstances, Asia.com Class A common stock. Since Asia.com is no longer
pursuing its wireless business, management does not expect to achieve these
wireless revenue targets and, accordingly, does not expect to issue any
additional consideration.
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 80,083 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 255,049 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 now account 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. 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. During the
first quarter of 2001, we further reduced our investment in 3Cube by $59,000 to
$2 million, representing the amount we received upon the sale of our investment
in August 2001.
On July 25, 2000, we entered into a strategic relationship with BulletN.net,
Inc. The investment has been accounted for under the cost method of accounting,
as we own 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 to us in exchange for
364,431 shares of our Class A common stock valued at approximately $3.1 million.
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 its carrying value.
During the first quarter of 2001, we recorded an impairment charge of $2.6
million due to an other-than-temporary decline in the value of this investment.
This amount is included in impairment of investments within other income
(expense) in the March 31, 2001 statement of operations. On March 1, 2001, in
consideration of the exchange and cancellation of the 666,667 warrants at $3.75
per share and the waiver of certain anti-dilution rights, we received a new
warrant to purchase 266,667 shares of BulletN.net common stock at $1.00 per
share.
27
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.
DEFERRED COMPENSATION
We have recorded amortization of deferred compensation of approximately $0 and
$91,000 for the quarter ended September 30, 2001 and 2000, respectively, in
connection with the grant of stock options to one of our officers. For the nine
months ended September 30, 2001 and 2000, we recorded $0 and $274,000 of
amortization expense. This deferral, which totaled $1.1 million at the date of
the grant, represented the difference between the deemed fair value of our
common stock for accounting purposes and the exercise price of the options at
the date of grant. This amount is represented as a reduction of stockholders'
equity and amortized over the three-year vesting period. Amortization of
deferred stock compensation is charged to sales and marketing expense on the
statement of operations. During the fourth quarter of 2000, the officer's
employment terminated and the remaining $387,000 of unamortized deferred
compensation was charged to additional paid in capital, representing forfeited
options.
During the second quarter of 1999, we issued 105,150 and 5,000 stock options to
certain employees at $5.00 per share. The fair value of our common stock on the
dates of grant was $11 and $7 per share, respectively. Accordingly, we recorded
deferred compensation of approximately $641,000 in connection with these
options. At March 31, 2001, all of the employees' employment was terminated and
the remaining unamortized deferred compensation of $141,000 was charged to
additional paid in capital, representing forfeited options.
As a result of our acquisition of the EasyLink services business from AT&T in
February 2001, we recorded deferred compensation of approximately $509,000
associated with the issuance of our Class A common stock to certain employees.
Amortization of deferred compensation associated with this issuance was
approximately $127,000 and $212,000 for the three and nine months ended
September 30, 2001.
RESULTS OF OPERATIONS THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2001 AND 2000
Revenues
Revenues for the three months ended September 30, 2001 were $37.6 million, as
compared to $18.5 million for the comparable period in 2000. Revenues for the
nine months ended September 30, 2001 were $96.0 million as compared to $43.5
million for the comparable period in 2000. The increases were due primarily to
revenues generated from the business messaging market including revenues
associated with our acquisition of STI on February 23, 2001.
Business messaging revenues for the three months ended September 30, 2001 were
$36.5 million as compared to $8.8 million for the comparable period of 2000. For
the nine months ended September 30, 2001 and 2000, business messaging revenues
were $88.4 million and $20.9 million, respectively. Business messaging revenues
were derived from managed e-mail and groupware hosting services; services that
protect corporate e-mail systems such as virus protection, spam control and
content filtering services; message delivery services such as electronic data
interchange or "EDI," telex, desktop fax, broadcast and production messaging
services; and professional messaging services and support.
Advertising network revenues, included in messaging revenues, amounted to $6.3
million for the three months ended September 30, 2000. No advertising revenues
were earned in the quarter ended September 30, 2001, as we sold our advertising
network to Net2Phone, Inc on March 30, 2001. Net2Phone paid us $3 million in
cash at the closing and on April 13, 2001, we received an additional $500,000
based upon our achievement of certain milestones set forth in the agreement. In
connection with the sale the parties entered into a hosting agreement whereby we
will receive payments for hosting the consumer mailboxes 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 pay for
this service. On November 14, 2001, the company entered into an agreement with
Net2Phone terminating the hosting agreement as of September 30,2001. See also
note (2). For the first nine months of 2001 advertising network revenues were
$1.7 million as compared to $17.2 million for the comparable period of 2000.
Advertising network revenues were derived principally from the sale of banner
advertisements. Other advertising revenue sources included up-front placement
fees and promotions. The Company's advertising products consisted of banner
advertisements that appeared on pages within the Company's properties,
promotional sponsorships that were typically focused on a particular event and
merchant buttons on targeted advertising inventory encouraging users to complete
a transaction.
The Company also traded advertisements on its Web properties in exchange for
advertisements on the Internet sites of other companies. Barter revenue, which
is a component of advertising revenue, amounted to $0.6 million and $1.0 million
for the nine months ended September 30, 2001 and 2000. For the nine months ended
September 30, 2001 and 2000, barter expenses, which are a component of cost of
revenues, were the same amounts at $0.6 million and $1.0 million, respectively.
Domain development revenues were $1.0 million for the quarter ended September
30, 2001 as compared to $3.5 million for the quarter ended September 30, 2000.
Domain development revenues were $5.8 million for the nine months ended
September 30, 2001 as compared to $4.9 million for the nine months ended
September 30, 2000. The reduction in revenues in the current quarter is a direct
result of the sale of the business of the Company's majority owned subsidiary,
Asia.com, Inc. on May 3, 2001.
OPERATING EXPENSES
Cost of Revenues
Cost of revenues for the three months ended September 30, 2001 was $20.4
million, as compared to $16.6 million for the comparable period in 2000. For the
nine months ended September 30, 2001 cost of revenues were $65.7 million as
compared to $40.3 million in the comparable period of 2000. The increases in
costs for the three and nine month periods are the result of increased revenues,
but as a percentage of revenues these costs decreased from the inclusion of
higher margin revenues associated with our acquisition of STI, including the
EasyLink Services business, in February 2001. Gross margin for the three months
ended September 30, 2001 improved to 46% as compared to 11% for the comparable
period of 2000. Gross margin for the nine months ended September 30, 2001
improved to 32% as compared to 7% for the comparable period of 2000.
Cost of revenues consists primarily of costs incurred in the delivery and
support of our facsimile services, including depreciation of equipment used in
our computer systems, the cost of telecommunications services including local
access charges, leased network backbone circuit costs and long distance domestic
and international termination charges, and personnel costs associated with our
systems, databases and graphics as well as our e-mail service. Cost of revenues
also includes costs associated with licensing third party network software. In
addition, as it related to our advertising network, we reported the cost of
barter trades, amortization of certain domain assets in cost of revenues.
Sales and Marketing Expenses
Sales and marketing expenses were $5.7 million for the three months ended
September 30, 2001 as compared to $18.4 million for the comparable period in
2000. For the nine months ended September 30, 2001 and 2000, sales and marketing
costs were $26.3 million and $50.2 million, respectively. These expense
decreases were primarily due to the reduction and eventual elimination of
expenditures associated with our advertising network in anticipation of and
eventual sale of that business on March 30, 2001 and the sale of our Asia.com
business on May 3, 2001. Partially offsetting these reductions was an increase
in expenses as a result of the acquisition of STI. Included in this category are
costs related to salaries and commissions for sales, marketing, and business
development personnel. Prior to the sale of our advertising network, this
category included costs associated with various advertising campaigns to build
our brand. One of the primary components of sales and marketing expenses were
customer acquisition costs related to our advertising network. Such costs were
$8.3 million in the first nine months of 2000. We are no longer incurring such
costs in 2001. An amendment to the CNET, Snap and NBC agreement signed during
the second quarter of 1999 eliminated the monthly issuance of shares, but
required us to issue shares under the contract simultaneously with our initial
public offering in June 1999. The value of these shares ($18.1 million) was
being amortized over the subsequent two-year period. We recorded approximately
$2.3 million of amortization expense in connection with the issuance of these
shares during the three-month period ended September 30, 2000. Amortization
expense for the nine months ended September 30, 2001 and 2000 was $2.3 million
and $6.9 million, respectively. We also recorded $0, and $49,000 in amortization
of partner advances of shares to CNN for the quarter ended September 30, 2001
and 2000, respectively. Amortization expense for the nine months ended September
30, 2001 and 2000 was $0 and $271,000, respectively. As previously mentioned,
during the first quarter of 2000, the Company expensed $3.3 million of deferred
costs related to the AT&T warrants.
General and Administrative Expenses
General and administrative expenses were $11.4 million during the three months
ended September 30, 2001 as compared to $13.6 million during the comparable
period of 2000. For the nine months ended September 30, 2001, general and
administrative costs were $36.8 million as compared to $32.0 million for the
nine months ended September 30, 2000. The decrease in expenses for the September
2001 quarter in comparison to the September 2000 quarter resulted from planned
cost reduction measures offset by higher costs related to acquisitions.
Conversely, the increase for the nine month period was attributable to higher
costs associated with our acquisition of STI and the EasyLink Services business
in February 2001 and the acquisition of GN in July 2001, partially offset by
reductions in expenses associated with our advertising network in anticipation
of and eventual sale of that business on March 30, 2001 and the sale of our
Asia.com business on May 3, 2001.
In connection with the Mauritius acquisition made during the first quarter of
2000, we incurred a $1.8 million charge related to the issuance of 104,347
shares of Class A common stock as compensation for services performed. We
anticipate that general and administrative costs will decrease in subsequent
periods showing the effect of transitioning support services from AT&T and
integrating them with our internal services.
Product Development Expenses
Product development expenses were $1.8 million for the three months ended
September 30, 2001 as compared to $4.7 million in comparable period of 2000. For
the nine months ended September 30, 2001, product development costs were $8.0
million as compared to $13.9 million for the nine months ended September 30,
2000. Product development costs consist primarily of personnel and consultants'
time and expense to research, conceptualize, and test product launches and
enhancements to our business messaging products. The decreases of $2.9 million
and $5.9 million reflect the elimination of expenditures for development of our
consumer email services, as a result of outsourcing our consumer email platform
to a third party and the sale of our Asia.com business on May 3, 2001. We
anticipate that product development costs will remain at the current quarter
level in future periods.
Amortization of Goodwill and Other Intangible Assets and Write-off of Acquired
In-Process Technology
Goodwill represents the excess of the purchase price over the fair market value
of the net assets acquired and is being amortized over a 3 to 10 year period.
Amortization of goodwill and other intangible assets for the three months ended
September 30, 2001 was $12.8 million as compared to $17.8 million for the three
months ended September 30, 2000. Amortization of goodwill and other intangible
assets for the nine months ended September 30, 2001 was $41.7 million as
compared to $42.3 million for the comparable period of 2000. The write-off of
acquired in-process technology of $7.7 million was attributable to our
acquisition of NetMoves in February 2000.
Restructuring Charges
During the first nine months of 2001, we recorded a restructuring charge of
$72.0 million in accordance with the provisions of EITF 94-3, and Staff
Accounting Bulletin 100. Our restructuring initiatives are related to our
strategic decisions to exit the consumer messaging business and WORLD.com
business and to focus on the Company's outsourced messaging business.
29
During the first nine months of 2001, the Company's restructuring program
included an incremental reduction in the workforce of approximately 150
employees. The restructuring program included total asset disposals of $68.6
million comprised of (1) $44.5 million in write-downs of goodwill and other
intangible assets primarily in connection with management's decision to sell its
WORLD.com properties, the majority of which related to its Asian portal business
(see Note 2), and (2) a write-down of $24.1 million of excess fixed assets and
other assets to their net realizable values.
The following sets forth the activity in the Company's restructuring reserve (in
thousands):
Beginning Current year- Current year- Ending
balance provision utilization balance
------- --------- ----------- -------
Employee termination benefits......... $559 $2,377 $2,448 $488
Lease abandonments.................... 3,136 1,034 3,543 628
Asset disposals....................... -- 68,601 68,601 --
Other exit costs...................... 353 2 337 19
--- - --- --
$4,048 $72,014 $74,929 $1,135
====== ======= ======= ======
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' web
community, and the number of visitors to the associated business' 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 e-mail addresses for many of the domains were sold to Net2Phone as part of
the sale of the advertising network. As a result of this and eroding market
conditions, management determined that the carrying value of many of these
domains were impaired and recorded an impairment charge of $3.4 million to
reduce the carrying value of these assets to anticipated values to be received
from a third party in the first quarter of 2001.
During the second quarter of 2001, we recorded additional impairment charges of
approximately $6.7 million as management determined that the carrying value of
certain intangible and other assets were permanently impaired. This charge is
comprised of write-downs to intangible assets, primarily workforce, of TCOM
valued at $1.3 million, goodwill associated with India.com of $3.4 million and
goodwill associated with a messaging acquisition of $826,000 and certain fixed
and other assets related to India.com of $1.2 million.
The estimated impairment charges were adjusted by $0.05 million in the third
quarter of 2001 as a result of the actual disposition of certain assets.
Loss on Sale of Businesses
Loss on sale of businesses in the nine months ended September 30, 2001 consists
of a $2.3 million loss attributable to the sale of our advertising network that
was sold on March 30, 2001 and a $0.3 million loss on the sale of the Asia.com
business on May 3, 2001.
Other Income (Expense), Net
Interest income for the three months ended September 30, 2001 was $0.1 million
as compared to $1.0 million during the comparable period of 2000. Interest
income for the nine months ended September 30, 2001 was $0.6 million as compared
to $4.4 million during the comparable period of 2000. The decreases were due to
lower cash balances available for temporary investments.
Interest expense was $2.4 million for the three months ended September 30, 2001
as compared to $2.7 million in the comparable period of 2000. Interest expense
was $8.0 million for the nine months ended September 30, 2001 as compared to
$6.8 million in the comparable period of 2000. The changes in interest expense
are the net result of additional interest charges in 2001 on obligations related
to the acquisition of STI, including the EasyLink Services business; and, the
non recognition of interest expense in 2001 on debt resulting from exchange
transactions on $75.9 million of original 7% Convertible Notes issued in 2000 in
accordance with FASB Statement No. 15, "Accounting by Debtors and Creditors for
Troubled Debt Restructuring".
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 one of its cost investments was
other-than-temporary and recorded an impairment charge of $2.6 million for the
quarter ended March 31, 2001. Additionally we recorded an impairment charge of
$0.6 million relating to an equity investment, as management determined that the
decline in the value of its investment was other-than-temporary. During the
quarter ended June 30, 2001, we recorded additional impairment charges of
approximately $7.5 million as management determined that the carrying value of
certain cost investments were permanently impaired.
30
Extraordinary Gains
On March 28, 2001, we completed the issuance of $23.8 million of principal
amount of 10% Senior Convertible Notes ("Exchange Notes") in exchange for the
cancellation of $75.9 million of 7% Convertible Subordinated Notes (the "Notes")
The above exchange transactions have been accounted for in accordance with FASB
Statement No. 15, "Accounting by Debtors and Creditors for Troubled Debt
Restructurings." On May 23, 2001, an additional $2.5 million of 10% Senior
Convertible Notes were exchanged for 1,420,713 shares of our Class A common
stock. As a result of these exchanges, we recorded a $41.6 million of
extraordinary gain on the exchange of convertible notes during the nine months
ended September 30, 2001. (See also Note 4.)
On July 12, 2001, the Company entered into an agreement to acquire 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, payable on December 31, 2001 and received approximately $175,000 for
transition services during the third quarter of 2001 and collected and retained
a percentage of certain accounts receivable collected on behalf of GN. GN offers
value-added messaging services to over 3000 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 FASB 141.
Liquidity and Capital Resources
Sources of Financing
Since our inception, we have obtained financing through private placements of
convertible debt and equity securities, equipment leases, our initial public
offering including the exercise of the over-allotment option and through a
convertible debt offering.
During the first nine months of 2001, we raised approximately $14.4 million
dollars from the issuance of 10% Senior Convertible Notes and $3 million from
the issuance of Class A common stock.
On February 14, 2001, we announced that we entered into a bridge funding and
amendment agreement that would allow us to borrow up to $5 million from our
majority-owned subsidiary India.com pursuant to a bridge note. As of September
30, 2001, we borrowed $5 million under this agreement. In connection with
settling the obligations under the Exchange Agreement with the minority
investors in India.com, we have subsequently eliminated our obligations under
the outstanding bridge notes in the aggregate principal amount of $5 million and
the outstanding warrants issued to India.com to purchase 1 million shares of our
Class A common stock. See note 12 to our condensed consolidated financial
statements.
During the first nine months of 2001, we took additional actions to further
reduce our cash burn. These actions included additional staff layoffs in some of
our businesses as well as the completion of and anticipated completion of the
sale of certain of our businesses. Accordingly, we incurred additional
restructuring and impairment charges to reduce the value of certain of our
acquisitions and investments. This is due to the continuous and prolonged
decline in valuations of Chinese and U.S. business and consumer portals,
including revenue multiples, as well as the lack of capital funding available to
Internet-related businesses in order to fund their operating losses, and
continual investments that their management teams believe are necessary to
sustain operations. Such charges amounted to $72.0 million, of which
approximately $2 million was cash charges. Most of these charges covered
additional write-downs of tangible and intangible assets and the carrying value
of certain investments.
During the first nine months of 2001, Asia.com sold its business for $1.5
million in cash and the assumption of $1.5 million of liabilities and we sold
our advertising network business for $3 million in cash at the closing plus an
additional $500,000 in April 2001 based upon the achievement of certain
milestones by us.
On March 28, 2001, we completed the issuance of an aggregate of $23,840,250
principal amount of senior convertible notes in exchange for the cancellation of
$75.9 million principal amount of 7% Convertible Subordinated Notes. On May 23,
2001, $2.5 million of the Senior Convertible Notes were exchanged for the
issuance of 1,420,714 shares of Class A common stock in accordance with the
original exchange agreement. The reduction in outstanding indebtedness, together
with the ability to pay up to one-half of interest on the Senior Convertible
Notes in shares of Class A common stock, will reduce our cash interest
requirements.
In January 2000, we received net proceeds of $96.1 million from our convertible
debt offering. We also financed the majority of our capital expenditures through
lease lines.
On March 31, 2000, we entered into a $2 million Master Lease Agreement with
Leasing Technologies International, Inc ("Leasing Technologies"). The lease line
provides for the lease of new computers, office automation and other equipment.
In December 2000, Leasing Technologies reduced the $2 million line to $1.2
million. The amount that was outstanding at September 30, 2001 was $874,000.
Proposed Restructuring of Certain Debt and Lease Obligations
Restructuring of Certain Debt and Lease Obligations
EasyLink has entered into agreements with AT&T Corp., George Abi Zeid (the
former sole shareholder of Swift Telecommunications, Inc.) and equipment lessors
to restructure an aggregate of approximately $63 million of debt. Upon
completion of this restructuring, the Company will eliminate a principal amount
of approximately $43 million of debt and decrease its annual cash debt service
requirements from approximately $36 million to approximately $5 million for the
next two years. Closing of the Debt Restructuring is subject to satisfaction or
waiver of certain conditions, including completing a financing.
Under the terms of the Debt Restructuring, the Company will exchange 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, 19.7
million shares of Class A Common Stock and warrants to purchase 18 million
shares of Class A Common Stock. In addition, the Company has agreed to purchase
certain leased equipment for an aggregate purchase price of up to $3.5 million.
See Note (4) to the Company's Condensed Consolidated Financial Statements for a
description of the notes and the warrants.
The completion of the debt restructuring is subject to satisfaction or waiver of
certain conditions, including completing the financing on or before November 30,
2001, unless extended, and compliance with applicable NASDAQ stock market rules.
As of November 14, 2001, the Company has secured commitments for approximately
$10 million of financing. The maximum aggregate number of shares issuable
pursuant to these commitments is approximately 28 million shares of Class A
common stock. Completion of the financing is subject to execution and delivery
of definitive agreements and completion of the debt restructuring.
Approximately $5.7 million of this financing is represented by the investment of
cash in exchange for a number of shares of Class A common stock based on the
average of the closing prices of EasyLink's Class A common stock for the 10
consecutive trading days prior to the closing. If the average of the closing
prices of EasyLink's Class A common stock for the 10 consecutive trading days
prior to January 2, 2002 is less than $1.60 per share, then EasyLink will issue
additional shares to the purchasers such that the the shares issued at the
closing plus the shares issued pursuant to any adjustment on January 2, 2001 is
approximately 14.25 million shares of Class A common stock. Approximately $1.3
million of this financing is represented by the investment of cash on October
11, 2001 in exchange for senior convertible notes that are convertible into
approximately 5.2 million shares of Class A common stock. Approximately $3.0
million of this financing is 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 8.2 million shares of Class A
common stock.
The Company may also issue additional equity or equity-linked financing in the
amount of at least $5 million. It is contemplated that the securities issued
would be shares of Class A common stock pursuant to the above-described Class A
common stock financing or otherwise or debt or equity securities that are
exercisable or convertible into or exchangeable for shares of Class A common
stock.
Nasdaq Compliance
On July 27, 2001, the Company received a NASDAQ Staff Determination indicating
that it had failed to regain compliance with the $1.00 minimum bid price
requirement for continued listing. Nasdaq has since notified the Company that
EasyLink now complies with all requirements for continued listing on The Nasdaq
National Market due to the Nasdaq moratorium on the minimum bid price
requirement. Under the moratorium, the minimum bid price requirement will be
suspended until January 2, 2002, at which time the 30- and 90-day periods
provided by Nasdaq marketplace Rule 4310(c)(8)(B) will start anew. Specifically,
an issuer will be considered non-compliant with the minimum bid price
requirement only if it fails to satisfy the applicable requirement for 30
consecutive trading days following January 1, 2002. It would then be afforded a
90 calendar day grace period in which to regain compliance.
Cash Flow Statement Analysis and Future Cash Requirements
Net cash provided by operating activities was $3.8 million for the nine months
ended September 30, 2001, and net cash used in operating activities was $116.8
million for the nine months ended September 30, 2000. Cash provided by operating
activities was impacted by the net loss from operations and the extraordinary
gains on the conversion of convertible notes and the gain on the acquisition of
GN Store Nord A/S, offset by non-cash charges principally related to the
amortization of partner advances, depreciation and amortization of fixed assets,
amortization of goodwill and other intangible assets, proceeds from the sales
and maturities of marketable securities, the provision for restructuring and
impairments, and changes in operating assets and liabilities. In 2000, cash used
in operating activities was impacted by the net loss from operations and changes
in operating assets and liabilities, offset in part by the write-off of
in-process technology, non-cash charges related to partner agreements and
depreciation and amortization of fixed assets and intangible assets.
Net cash used in investing activities was $12.2 million for the nine months
ended September 30, 2001 and $13.0 million for the nine months ended September
30, 2000. In 2001, net cash used in investing activities consisted primarily of
purchases of property and equipment and net cash paid for acquisitions,
partially offset by the proceeds received from the sale of our advertising
network and Asia.com businesses. In 2000, net cash used in investing activities
was largely for purchases of property and equipment of $10.6 million
Net cash provided by financing activities was $11.7 million for the nine months
ended September 30, 2001 and $104.9 million for the nine months ended September
30, 2000. During the first nine months of 2001, we received $14.1 million from
the issuance of senior convertible notes and $3.0 million from the issuance of
our Class A Common Stock. During the first nine months of 2000, we received
$96.1 million from the issuance of convertible notes, $2.7 million in proceeds
from the issuance of Class A common stock in connection with the exercise and
purchase of options and warrants, and $16.2 million in proceeds from the sale of
a subsidiary interest. .
At September 30, 2001, the Company maintained approximately $279,317 in letters
of credit ("LC") with various parties. These LCs are related to the leasing of
telecommunications equipment.
At September 30, 2001, we had $11.1 million of cash and cash equivalents and
$20,000 of 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
and commitments for capital expenditures. For the year ended December 31, 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 incurred a net loss of
$143.5 million for the nine months ended September 30, 2001, and have an
accumulated deficit of $450.7 million as of September 30, 2001. We believe that
we will need additional financing to meet cash requirements and the availability
of such financing when needed, on terms acceptable to us, or if at all, is
uncertain. If we are unable to raise additional financing or generate sufficient
cash flow, we may be unable to continue as a going concern.
32
Our unaudited condensed 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, and ultimately to achieve
profitable operations. During the first quarter of 2001, we raised $16.9 million
through the sale of senior debt securities and common equity. We also acquired
STI and EasyLink Services, requiring a cash outlay of $16 million. Management
believes that this acquisition significantly enhances the scale of our customer
base and global network. Management has implemented internal actions to improve
our operations and liquidity including a reduction of our workforce, closure of
some of our businesses operating with negative cash flows, and we sold our
advertising network for $3 million. On May 3, 2001, our majority owned
subsidiary Asia.com sold its business to an investor group that paid $1.5
million in cash and assumed Asia.com liabilities of approximately $1.5 million.
After satisfaction of other Asia.com liabilities and pro rata distributions to
other minority investors in Asia.com, we received proceeds from the sale of
approximately $1.1 million. Management continues the process of further reducing
operating costs, increasing our sales efforts with a new combined sales force
and seeking financing that is acceptable to us. During the quarter ended
September 30, 2001 the Company achieved a positive EBITDA (Earnings before
Interest, Taxes, Depreciation and Amortization) of $1.2 million, which excludes
certain non-operating items and other non-cash charges. Including these
non-operating items, non-cash charges and WORLD.com subsidiary, EBITDA was $1.6
million for the quarter.
Sales or issuances of additional equity securities, including as a result of the
proposed debt and lease restructurings described above, could result in
additional dilution to our stockholders. In addition, on an ongoing basis, we
continue to evaluate potential acquisitions to complement our business messaging
services. In order to complete these potential acquisitions, we may need
additional equity or debt financing in the future.
In addition, we previously announced that we will seek to sell all assets not
related to our core outsourced messaging business, including our India.com, Inc.
subsidiary, and our portfolio of domain names. We entered into an agreement
dated as of October 26, 2001 to sell the portal operations of our India.com,
Inc. subsidiary. In addition, on October 31, 2001 we sold the Mauritius entity
for a promissory note in the principal amount of $335,000. The closing is
subject to receipt of applicable governmental approvals in India. No assurance
can be given that the company will be successful in completing the sale of the
portal operations of India.com or selling these domain names or as to the timing
of such sales or otherwise raising the amount of capital needed to fund our
operations. The proceeds from the sale of these assets may not supply enough
cash to fund our operations, and we may experience delays in the completion of
these sales or receiving or converting into cash the consideration received in
these sales.
Recent Accounting Pronouncements
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's adoption
of this statement in the first quarter of 2001 did not have a significant impact
on the Company's financial statements as it does not currently use derivative
instruments or hedging activities.
In July 2001, the FASB issued Statement No. 141, Business Combinations, and
Statement No. 142, Goodwill and Other Intangible Assets. Statement 141 requires
that the purchase method of accounting be used for all business combinations
initiated after June 30, 2001 as well as all purchase method business
combinations completed 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 will require 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 will also require 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 SFAS
No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of.
The Company is required to adopt the provisions of Statement 141 immediately,
except with regard to business combinations initiated prior to July 1, 2001,
which it expects to account for using the pooling-of-interests method, 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 will
continue to be amortized prior to the adoption of Statement 142.
Statement 141 will require 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 will be 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 will be 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 will require the Company to perform an assessment of whether there is an
indication that goodwill [and equity-method 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 will then have 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 would 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.
33
As of the date of adoption, the Company expects to have unamortized goodwill and
other intangible assets in the amount of $165.5 million, which will be subject
to the transition provisions of Statements 141 and 142. Amortization expense
related to goodwill and other intangible assets was $41.7 million and $60.8
million for the nine months ended September 30, 2001 and for the year ended
December 31, 2000 respectively. Because of the extensive effort needed to comply
with adopting Statements 141 and 142, it is not practicable to reasonably
estimate the impact of adopting these Statements on the Company's financial
statements at the date of this report, including whether any transitional
impairment losses will be required to be recognized as the cumulative effect of
a change in accounting principle.
In August 2001, the Financial Accounting Standards Board issued FASB Statement
No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets
(Statement 144), which supersedes both FASB Statement No. 121, Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of
(Statement 121) and the accounting and reporting provisions of APB Opinion No.
30, Reporting the Results of Operations-Reporting the Effects of Disposal of a
Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring
Events and Transactions (Opinion 30), for the disposal of a segment of a
business (as previously defined in that Opinion). Statement 144 retains the
fundamental provisions in Statement 121 for recognizing and measuring impairment
losses on long-lived assets held for use and long-lived assets to be disposed of
by sale, while also resolving significant implementation issues associated with
Statement 121. For example, Statement 144 provides guidance on how a long-lived
asset that is used as part of a group should be evaluated for impairment,
establishes criteria for when a long-lived asset is held for sale, and
prescribes the accounting for a long-lived asset that will be disposed of other
than by sale. Statement 144 retains the basic provisions of Opinion 30 on how to
present discontinued operations in the income statement but broadens that
presentation to include a component of an entity (rather than a segment of a
business). Unlike Statement 121, an impairment assessment under Statement 144
will never result in a write-down of goodwill. Rather, goodwill is evaluated for
impairment under Statement No. 142, Goodwill and Other Intangible Assets.
The Company is required to adopt Statement 144 no later than the year beginning
after December 15, 2001, and plans to adopt its provisions for the quarter
ending March 31, 2002. Management does not expect the adoption of Statement 144
for long-lived assets held for use to have a material impact on the Company's
financial statements because the impairment assessment under Statement 144 is
largely unchanged from Statement 121. The provisions of the Statement for assets
held for sale or other disposal generally are required to be applied
prospectively after the adoption date to newly initiated disposal activities.
Therefore, management cannot determine the potential effects that adoption of
Statement 144 will have on the Company's financial statements.
ITEM 3 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 operations in the
United Kingdom, Singapore, Malaysia and India. Fluctuations in exchange rates
may have an adverse effect on the Company's results of operations and could also
result in exchange losses. The impact of future rate fluctuations cannot be
predicted adequately. To date the Company has not sought to hedge the risks
associated with fluctuations in exchange rates.
Market Risk - Our accounts 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. Marketable securities are comprised
of U.S. Treasury Notes and are classified as available-for-sale and subject to
interest rate fluctuations.
Risk Factors That May Affect Future Results
Before you invest in our Class A common stock, you should carefully consider the
risks described below and the other information included or incorporated by
reference in this prospectus.
We Have Only a Limited Operating History, We Are Involved in a New and Unproven
Industry and We Have Determined To Focus On Our Core Outsourced Messaging
Business.
We have only a limited operating history upon which you can evaluate our
business and our prospects. We have offered a commercial email service since
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 Internet message 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 our outsourced messaging business 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 outsourced e-mail services and of message delivery services such as
electronic data interchange or EDI, fax and telex services. Swift is a provider
of 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 entered into an agreement to sell the portal
operations of India.com, Inc. Our success will depend in part upon our ability
to maintain or expand our sales of message delivery services such as EDI and fax
services to enterprises, the development of a viable market for fee-based e-mail
and groupware services on an outsourced basis, our ability to compete
successfully in those markets and our ability to successfully sell our non-core
assets on favorable terms. For the reasons discussed in more detail below, there
are substantial obstacles to our achieving and sustaining profitability.
We Have Incurred Losses Since Inception and Expect to Incur Substantial Losses
in the Future.
We have generated only limited revenues to date. 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 $143.5 million for the first nine
months of 2001 and $229.5 million for the year ended December 31, 2000. We had
an accumulated deficit of $450.7 million as of September 30, 2001. We expect to
continue to incur substantial net losses and negative operating cash flow for
the foreseeable future. We intend to expand our sales and marketing operations,
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, which may
result in significant amortization of goodwill and other expenses. 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. If we do not succeed in
substantially increasing our revenues or integrating the EasyLink Services and
Swift businesses with our historical business, our losses will continue
indefinitely and will increase.
34
If We Are Unable to Raise Necessary Capital in the Future, We May Be Unable to
Fund Necessary Expenditures.
We anticipate the need to raise additional capital in the near future. See Part
I. Item 2 -- Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Liquidity and Capital Resources. At September 30, 2001,
we had $11.1 million of cash and cash equivalents and $20,000 of marketable
securities. Our principal commitments consist of subordinated convertible notes,
senior convertible notes, notes payable, obligations under capital leases,
domain asset purchase obligations, accounts payable and other current
obligations and commitments for capital expenditures. For the year ended
December 31, 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 believe
that we will need additional financing to meet cash requirements for our
operations, and the availability of such financing when needed, on terms
acceptable to us, or if at all, is uncertain. Moreover, we believe that our
ability to raise additional funds may be depend on the successful completion of
the proposed restructuring of our outstanding debt and lease obligations. See
"Risk Factors That May Affect Future Results - We May Be Unable to Pay Debt
Service on Our Indebtedness for Money Borrowed and Other Obligations." If we are
unable to raise additional financing or generate sufficient cash flow, 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 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. If the proposed
restructurings of certain of our debt and lease obligations is successful, we
will issue a substantial amount of additional Class A common stock and
securities convertible into or exerciseable for shares of Class A common stock.
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 Intend to Sell All of Our Assets Not Related to Our Core Outsourced Messaging
Business But May Experience Difficulty Completing Any or All of Such Sales on
Favorable Terms or At All.
We recently announced our intention to sell all of our non-core assets,
including our advertising network business, our Asia.com, Inc. and India.com,
Inc. subsidiaries and our portfolio of Internet domain names. On March 30, 2001,
we completed the sale of our advertising network business to Net2Phone. 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 entered into an
agreement to sell the portal operations of India.com, Inc. We cannot assure you
that we will be able to sell all or any of our remaining non-core assets on
favorable terms or at all. We also cannot assure you as to the timing or the
terms and conditions of the sale of any of these assets or the form or amount of
consideration (if any) that may be received. The realizable value of these
assets may ultimately prove to be less than the carrying value currently
reflected in our consolidated financial statements. Moreover, if the sales are
not successfully completed, the market price of our common stock may decline to
the extent that the current market price reflects a market assumption that such
sales will be successfully completed. To the extent that we receive non-cash
consideration in any of these sales, we may not be able to liquidate this
consideration or otherwise turn it into cash for a period of time after we
receive it or at all.
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 a variety of message delivery 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:
o inability to raise the required capital;
o difficulty in assimilating the acquired operations and
personnel;
o inability to retain any acquired member or customer accounts;
o disruption of our ongoing business;
o the need for additional capital to fund losses of acquired
businesses;
o inability to successfully incorporate acquired technology into
our service offerings and maintain uniform standards,
controls, procedures and policies; and
o 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.
We May Be Unable to Successfully Integrate the EasyLink Services Business
Acquired From AT&T.
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
messaging services such as e-mail, EDI, fax and telex 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. The messaging network for
this business resides on AT&T's managed network and is being operated and
maintained for EasyLink by AT&T pursuant to a Transition Services Agreement. In
addition, AT&T will continue to provide a variety of business and administrative
functions for the business. We plan to migrate off the AT&T network to the
EasyLink network and to assume responsibility for these other functions over the
next two years.
35
Under the Transition Services Agreement, we are purchasing a variety of services
from AT&T to enable us to continue to operate the business pending the
transition to EasyLink. See Part I. Item 1. Business -- Transition Services
Agreement and Master Carrier Agreement with AT&T Corp. -- in our Form 10-K for
the year ended December 31, 2000 filed on April 2, 2001.
We cannot assure you that we will be able to successfully transition the
EasyLink Services network and other operations from AT&T to us, or successfully
integrate them into our operations, in a timely manner or without incurring
substantial unforeseen expense. Even if successfully transitioned and
integrated, we may be unable to operate the business at expense levels that are
ultimately profitable for us. Our inability to successfully transition,
integrate or operate the network and operations of the EasyLink Services
business will result in a material adverse effect on our business, results of
operations and financial condition.
We Have Incurred Significant Indebtedness For Money Borrowed.
As of September 30, 2001, we had approximately $134.6 million principal amount
of outstanding indebtedness for borrowed money and capital leases. We may incur
substantial additional indebtedness in the future. The level of our
indebtedness, among other things, could (1) make it difficult for us to make
payments on our indebtedness, (2) make it difficult to obtain any necessary
financing in the future for working capital, capital expenditures, debt service
requirements or other purposes, (3) limit our flexibility in planning for, or
reacting to changes in, our business, and (4) make us more vulnerable in the
event of a downturn in our business.
We May Be Unable to Pay Debt Service on Our Indebtedness for Money Borrowed and
Other Obligations.
We had an operating loss and negative cash flow during the first nine months of
2001 and for the year ended December 31, 2000 and expect to incur substantial
losses and negative cash flows for the foreseeable future. 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 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. We cannot assure you that the proposed sale of our remaining
non-core assets will not negatively impact our cash flow available to service
our debt. 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 indenture for the convertible notes, including any deemed sale
of all or substantially all of our assets.
The Company announced on September 25, 2001 that it had entered into agreements
with AT&T Corp., George Abi Zeid (the former sole shareholder of Swift
Telecommunications, Inc.) and equipment lessors to restructure outstanding debt
and equipment lease obligations. The agreements related to an aggregate of
approximately $63 million of debt and capital lease obligations. Under the terms
of the restructuring, the Company will exchange 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, 19.7 million shares of
Class A Common Stock and warrants to purchase 18.0 million shares of Class A
Common Stock. Closing of the debt restructuring is subject to completion of a
financing and compliance with the requirements of the Nasdaq stock market. No
assurance can be given that the Company will successfully complete the proposed
debt restructurings on the terms currently reflected in the restructuring
agreements or at all.
Outsourcing of E-mail and Groupware Services and Message Delivery 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 the best message
delivery services today and by offering these customers managed e-mail and other
messaging services in the future. The market for managed e-mail, groupware
services and other messaging services such as virus protection, spam control and
content filtering services and professional messaging services is only beginning
to develop. Our success will depend on the continued expansion of the market for
outsourced message delivery services such as EDI and fax services and the
development of viable markets for the outsourcing of managed e-mail and
groupware services, services to protect corporate e-mail systems from viruses,
spam and offensive content and related professional messaging services. Each of
these developments is somewhat speculative.
There are significant obstacles to the development of a sizable market for
messaging services outsourcing. 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 messaging services 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 messaging services, we
cannot be sure that we will be able to maintain or expand our business customer
base or that we will be able to sell managed messaging services such as e-mail
and groupware hosting services, virus protection, spam control or content
filtering services or professional services to this customer base. In addition,
the sales cycle for managed messaging services such as hosting services is
lengthy and could delay our ability to generate revenues in the managed
messaging services market. As part of our business strategy, we plan to offer
additional outsourced messaging and other services to existing customers. We
cannot assure you that these customers will purchase these services or will
purchase them at prices that we wish to charge. Furthermore, we may not be able
to generate significant additional revenues by providing our outsourced e-mail
and groupware services to businesses. Standards for pricing in the business
e-mail and groupware services market 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.
36
We May Fail to Meet Market Expectations Because of Fluctuations in Our Quarterly
Operating Results, Which Would Cause Our Stock Price to Decline.
Although we intend to steadily increase our spending and investment to support
our planned growth, our revenues (and some of our costs) will be much less
predictable. This is likely to result in significant fluctuations in our
quarterly results, and to limit the value of quarter-to-quarter comparisons.
Because of our limited operating history, the emerging nature of our industry
and our planned sale of our non-core assets, we anticipate that securities
analysts will have difficulty in accurately forecasting our 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:
o incurrence of other cash and non-cash accounting charges,
including charges resulting from acquisitions or dispositions
of assets, including from the disposition of non-core assets
such as our Asia.com and India.com subsidiaries, and
write-downs of impaired assets;
o non-cash charges associated with repriced stock options;
o system outages, delays in obtaining new equipment or problems
with planned upgrades;
o disruption or impairment of the Internet;
o demand for outsourced messaging services;
o attracting and retaining customers and maintaining customer
satisfaction;
o introduction of new or enhanced services by us or our
competitors;
o changes in our pricing policy or that of our competitors;
o changes in governmental regulation of the Internet and
messaging in particular; and
o general economic and market conditions.
Other such factors in our non-core businesses include:
o incurrence of additional expenditures without receipt of
offsetting revenues pending the sale of these businesses.
We Expect Significant Stock Based Compensation Charges Related to Repriced
Options.
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 the
closing price of the Company's Class A common stock on NASDAQ on November 14,
2000. Options to purchase 6,327,986 shares were repriced. The repriced options
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. 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.
Depending upon movements in the market value of the Company's common stock, 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 our Form 10-K for the year ended
December 31, 2000 filed on April 2, 2001."
37
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 business services and products such
as Internet access and other telecommunications services, browser software,
homepage design, Web site hosting and software and hardware solutions in
addition to messaging services. The ability of these competitors to offer a
broader suite of complementary services 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.
Our Rapid Expansion Is Straining Our Existing Resources, and if We Are Not Able
to Manage Our Growth Effectively, Our Business and Operating Results Will
Suffer.
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 the market for
outsourced messaging services. At the same time, we announced our intention to
sell all of our non-core assets, including our advertising network business, our
World.com subsidiaries Asia.com and India.com and our portfolio of domain names.
This expansion and the decision to sell all of our non-core assets 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 or the sale
of non-core assets 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 Chief
Executive Officer, Brad Schrader, our President, 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, Schrader 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 salespeople 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
Messaging 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 messaging services.
Because we have only been providing some of our services such as managed e-mail
and groupware 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 email traffic or other customer
requirements. In addition, the very process of upgrading our computer systems is
likely to cause service disruptions. This is because we will have to take
various elements of the network out of service in order to install some
upgrades.
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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, unsolicited bulk emails that
overload our system, failures in telecommunications and other services provided
to us by third parties and other computer system failures. In particular, we
have experienced outages and delays in email delivery and access to our email
service related to disk failures, the implementation of changes to our computer
system, insufficient storage capacity and other problems. These failures have
resulted and may continue to result in significant disruptions to our service.
Although we plan to install backup computers and implement procedures to reduce
the impact of future malfunctions in these systems, the presence of these and
other single points of failure in our network increases the risk of service
interruptions. Some aspects of our computer systems are not redundant. These
include our database system and our email storage system, which stores emails
and other data. In addition, substantially all of our computer and
communications systems relating to our email services other than the systems
located and operated by AT&T Corp. under our Transition Services Agreement with
them are currently located in our primary data centers in Manhattan, Edison, New
Jersey 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
stored emails and other customer files, causing significant customer
dissatisfaction and possibly giving rise to claims for monetary damages.
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 and consumer demand and add new
features to our services very rapidly. We also have to regularly upgrade our
software to ensure that it remains compatible with the wide and changing variety
of Web browsers and other software used by our customers. 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 messaging 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 many ISPs, employers and schools can interfere with the operation of
our services.
We are Dependent on Licensed Technology.
We license a significant amount of technology from third parties, including
technology related to our managed e-mail and groupware services, 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., Worldcom, MFS, BBN Planet and UUNET for a variety
of telecommunications and Internet services. Pending the transition of the
network and operations for the EasyLink Services business acquired from AT&T, we
are dependent on the services being provided to us under our Transition Services
Agreement with AT&T. See "Risk Factors - We May Be Unable to Successfully
Integrate the EasyLink Services Business Acquired From AT&T." above and "Item 1.
Business - Technology" in our Form 10-K for the year ended December 31, 2000
filed on April 2, 2001.
39
Gerald Gorman Controls EasyLink and Will Be Able to Prevent A Change of Control.
Gerald Gorman, our Chairman, beneficially owned as of October 31, 2001 Class A
and Class B common stock representing approximately 51% 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. As a result of
his share ownership, Mr. Gorman will 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 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. We
do not have experience with some of the types of marketing that we are currently
using. 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 have limited
experience in international operations and 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:
o uncertain demand in foreign markets for messaging services;
o difficulties and costs of staffing and managing international
operations;
o differing technology standards;
o difficulties in collecting accounts receivable and longer
collection periods;
o economic instability and fluctuations in currency exchange
rates and imposition of currency exchange controls;
o potentially adverse tax consequences;
o 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;
o political instability, unexpected changes in regulatory
requirements, and reduced protection for intellectual property
rights in some countries;
o export restrictions, and
o difficulties in enforcing contracts and potentially adverse
consequences.
Regulation of Messaging 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.
40
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 the email or
fax 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. We may be subject to
legal proceedings and damage claims if we are found to have violated laws
relating to email content.
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 forebearance 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 instrastate 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 and this could have a
material adverse effect on our financial position, results of operations and
cash flows. 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
key 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.
41
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 recently enacted 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.
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
October 31, 2001, we had an aggregate of 107,601,130 shares of Class A and Class
B common stock outstanding. In addition, we are obligated to issue an additional
1,000,000 shares of our Class A common stock subject to certain conditions if
the closing price of our Class A common stock has not traded at or above $10 per
share for five consecutive days. As of September 30, 2001 we had options to
purchase approximately 18.5 million shares of Class A common stock outstanding.
As of October 31, 2001, we had warrants to purchase 476,871 shares of Class A
common stock outstanding. As of October 31 2001, we had approximately 34,861,098
shares of Class A common stock issuable upon conversion of outstanding senior
convertible notes and up to an additional 8,439,186 shares of Class A common
stock issuable over five years in payment of a portion of the interest on such
senior notes. In addition, we had 1,271,504 shares of Class A common stock
issuable upon conversion of our remaining outstanding 7% Convertible
Subordinated Notes due 2005 at an exercise price of $18.95 per share.
Moreover, if the proposed restructurings of certain of our debt and lease
obligations is successful, we will issue a substantial amount of additional
Class A common stock and securities convertible into or exercisable for shares
of Class A common stock. See Notes 4 and 12 to our Unaudited Condensed
Consolidated Financial Statements and "Part I. Item 2 -- Management's Discussion
and Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources."
As of October 31, 2001, approximately 75,830,920 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 31,770,210 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 October, 2001, the holders of approximately 45,070,520 shares of
outstanding Class A common stock and the holders of approximately 39,442,339
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. Upon closing of our proposed debt restructuring, approximately
19,700,000 additional shares, 18,000,000 additional shares issuable upon
conversion of warrants, 9,100,000 additional shares issuable upon conversion of
convertible securities and, based upon commitments received through November 14,
2001 in connection with our related financing, up to approximately 22,800,000
additional shares will also be entitled to registration rights. See Notes 4 and
12 Notes 4 and 12 to our Unaudited Condensed Consolidated Financial Statements.
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 $1 and state that a deficiency shall exist if
such minimum bid price remains below $1 for a period of thirty consecutive
business days. The minimum bid price of our stock has been below $1 during
various periods during the fourth quarter of 2000 and the first quarter of 2001
and has been below $1 during the period from March 14, 2001 through October 31,
2001.
42
On July 27, 2001, the Company received a Nasdaq Staff Determination indicating
that it had failed to regain compliance with the $1.00 minimum bid price
requirement for continued listing. Nasdaq has since notified the Company that
EasyLink now complies with all requirements for continued listing on The Nasdaq
National Market due to the Nasdaq moratorium on the minimum bid price
requirement. Under the moratorium, the minimum bid price requirement will be
suspended until January 2, 2002, at which time the 30- and 90-day periods
provided by Nasdaq marketplace Rule 4310(c)(8)(B) will start anew. Specifically,
an issuer will be considered non-compliant with the minimum bid price
requirement only if it fails to satisfy the applicable requirement for 30
consecutive trading days following January 1, 2002. It would then be afforded a
90 calendar day grace period in which to regain compliance.
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 Internet-related companies have been highly
volatile. A stock's price is often influenced by rapidly changing perceptions
about the future of the Internet 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 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 were 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 will 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 pay for this service. On November
14, 2001, we entered into an agreement with Net2Phone which terminated the
hosting agreement as of September 30, 2001.
Notwithstanding the migration of the consumer mailboxes to the third party
provider or the assignment of Web site contracts with third parties to
Net2Phone, we may nonetheless remain liable for our obligations under 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 are
assigned to them.
WE INTEND TO SELL OUR INDIA.COM, INC. SUBSIDIARY AND OUR PORTFOLIO OF DOMAIN
NAMES. UNTIL A SALE OR OTHER DISPOSITION IS COMPLETED, THE FOLLOWING SPECIAL
RISKS WILL CONTINUE TO APPLY TO THESE OPERATIONS:
In October 2001, we sold the Multiple Zones Mauritius Prvt. Ltd. subidiary of
India.com, Inc. and entered into an agreement to sell the portal operations of
India.com, Inc. No assurance can be given that the sale of the portal
operations, which is subject to governmental approvals in India, will be
completed.
The Limited Installed Personal Computer Base and High Cost of Accessing the
Internet in India Limits the Pool of Potential Customers for India.com.
The market penetration rates of personal computers and on-line access in India
are far lower than such rates in the United States. Alternate methods of
obtaining access to the Internet, such as through cable television modems or
set-top boxes for televisions, are currently unavailable in India. There can be
no assurance that the number or penetration rate of personal computers in India
will increase rapidly or at all or that alternate means of accessing the
Internet will develop and become widely available in India.
Our growth is limited by the cost to Indian consumers of obtaining the hardware,
software and communications links necessary to connect to the Internet in India.
If the overall costs required to access the Internet do not significantly
decrease, most of India's population will not be able to afford to use our
services. The failure of a significant number of additional Indian consumers to
obtain affordable access to the Internet would make it very difficult to execute
our business plan.
We Are Relying on Electronic Commerce as a Significant Part of India.com's
Future Revenue, but the Internet Has Not Yet Been Proven as an Effective
Commerce Medium in India.
India.com's revenue growth depends in part on the increasing acceptance and use
of electronic commerce in India. The Internet may not become a viable commercial
marketplace in India for various reasons, many of which are beyond our control,
including:
o inexperience with the Internet as a sales and distribution
channel;
o inadequate development of the necessary infrastructure to
facilitate electronic commerce;
43
o concerns about security, reliability, cost, ease of
deployment, administration and quality of service associated
with conducting business over the Internet; and
o inexperience with credit card usage or with other means of
electronic payment.
Underdeveloped Telecommunications Infrastructure and Unclear Telecommunications
Regulations Have Limited and May Continue to Limit the Growth of the Internet
Market in India.
The telecommunications infrastructure in India is not well developed. The
underdeveloped Internet infrastructure in India has limited the growth of
Internet usage there. If the necessary Internet infrastructure is not developed,
or is not developed on a timely basis, future growth of the Internet in India
will be limited and our business could be harmed.
Our India.com Business May Be Adversely Affected by Indian Government Regulation
of Internet Companies.
India has recently begun to regulate its Internet sector by making
pronouncements or enacting regulations regarding various Internet activities in
India and the legality of foreign investment in the Indian Internet sector.
There are substantial uncertainties regarding the proper interpretation of
current and future Indian Internet laws and regulations.
The Indian government is attempting to liberalize this sector and has enacted or
is currently considering enacting new legislation in that regard. For example,
Press Note No. 7 (2000 series) dated July 14, 2000, permits 100% foreign
investment in business-to-business e-commerce companies, subject to the
condition that "such investing companies" divest 26% of their equity in favor of
the Indian public in five years, if "these companies" are listed in other parts
of the world. It remains unclear as to whether the referenced listing is of the
Indian subsidiary or of the investor company. For retail e-commerce companies,
51% foreign equity investment is permitted. Press Note No. 8 (2000 series) dated
August 29, 2000, removes the earlier restriction on automatic approvals in cases
where a foreign investor had a previous or existing joint venture or technology
transfer/trademark agreements in the same or allied field in India for all
proposals relating to information technology.
In the telecom sector, the present cap on foreign equity is 49% and a license is
required to provide such services. However, the license required for ISPs has
been waived until October 31, 2003. Also, in Press Note No. 9 (2000 series)
dated September 8, 2000 the Indian government recently permitted 100% foreign
direct investment in relation to certain activities including:
o ISPs not providing gateways (applicable both for satellite and
submarine cables);
o Infrastructure providers providing dark fiber (IP category 1);
o Electronic mail; and
o Voice mail.
However, the above activities are still subject to the 26% divestment rule,
certain security restrictions and other regulations.
The government has also recently passed the Information Technology Act, 2000
which focuses on recognizing and regulating electronic transactions and records,
affecting:
o authentication of digital records;
o legal recognition of electronic records and digital
signatures;
o attribution, acknowledgment and dispatch of electronic
records;
o secure electronic records and digital signatures; and
o regulation of certifying authorities.
More legislation that is presently being discussed is a draft Information
Communication and Entertainment Bill, 2000 ("ICE Bill") that would govern the
rapid convergence of broadcasting, telecommunications and information
technologies. The ICE Bill contemplates the establishment of a Communication
Commission to license and regulate the provision of network facilities, network
services, application services or content application services and ownership of
wireless apparatus.
It is unclear how the ICE Bill, if enacted, or any of the legislation previously
discussed, will affect India.com's business and operations. Further, political
instability could halt or delay the liberalization of the Indian economy and
adversely affect business and economic conditions in India generally and our
business in particular. Although during the past decade, the government of India
has pursued policies of economic liberalization, including significantly
relaxing restrictions on the private sector and further reforms are still
expected under the current policy to promote the information technology and
software industries, political uncertainty still exists and a significant change
in India's economic liberalization and deregulation policies could adversely
affect business and economic conditions in India generally and our India.com
business in particular. Our Asia.com and India.com properties developed by
WORLD.com compete with the major business and consumer portals and other
providers of Internet services in the markets in which they operate.
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The interpretation and application of existing Indian laws and regulations and
the possible new laws or regulations have created substantial uncertainties
regarding the legality of existing and future foreign investments in, and the
businesses and activities of, Indian Internet businesses, including our
India.com business. Accordingly, it is possible that the relevant Indian
authorities could, at any time, assert that any portion or all of India.com's
existing or future ownership structure and businesses violates Indian laws and
regulations. It is also possible that the new laws or regulations governing the
Indian Internet sector that may be adopted in the future will prohibit or
restrict foreign investment in, or other aspects of, any of India.com's current
or proposed businesses and operations. In addition, these new laws and
regulations may be retroactively applied to India.com.
If India.com or any of its Indian-based subsidiaries is found to be in violation
of any existing or future Indian laws or regulations, the relevant Indian
authorities would have broad discretion in dealing with such a violation,
including, without limitation, the following:
o levying fines;
o revoking our business license;
o requiring us to restructure our ownership structure or
operations; and
o requiring us to discontinue any portion or all of our Internet
business.
PART II OTHER INFORMATION
Item 1: 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, claims by former employees and other
claims. These claims, even if not meritorious, could require us to expend
significant financial and managerial resources.
The Company has received and expects to continue to receive notices and claims
from certain third parties for disputed and unpaid accounts payable and other
obligations. The Company believes that it has appropriately reserved for the
amount of any liability that may arise out of these matters.
Item 2: Changes in Securities and Use of Proceeds
Recent Sales of Unregistered Securities
During the three months ended September 30, 2001, EasyLink issued Class A common
stock in reliance upon the exemption from registration pursuant to Section 4 (2)
of the Securities Act of 1933 or Regulation S promulgated thereunder or
otherwise not subject to registration in various transactions as follows:
During the three months ended September 30, 2001, we issued 314,424 shares of
Class A common stock to employees at a weighted average price of $0.335 per
share representing the Company's matching contribution to its 401(k) plan.
45
On July 6, 2001 we issued 400,000 shares to Bowling Green associates for the
settlement of lease obligation.
On July 15, 2001, we issued 560,467 shares in payment of interest on our
outstanding senior convertible notes.
On July 15, 2001, we issued 12,833 shares in lieu of interest on a portion of
our subordinated convertible notes.
On August 9, 2001, we issued 2,372,027 shares in lieu of the cash interest
payment due on our outstanding senior convertible notes.
Item 4: Submission of Matters to a Vote of Security Holders
(a) A Special Meeting of Stockholders was held on August 29, 2001.
(c) The following are the voting results on each of the matters that were
submitted to the shareholders
For Against Abstain Unvoted
--- ------- ------- -------
Proposals
---------
To approve a reverse stock split as follows:
1 for 2.................................... 154,399,524 2,527,541 66,394 23,775,794
1 for 3.................................... 154,198,100 2,706,382 88,977 23,775,794
1 for 4.................................... 154,078,324 2,830,058 85,077 23,775,794
1 for 5.................................... 154,174,713 2,725,969 92,777 23,775,794
1 for 6.................................... 154,027,997 2,872,785 92,677 23,775,794
1 for 7.................................... 154,016,354 2,885,328 91,777 23,775,794
1 for 8.................................... 153,998,092 2,900,990 94,377 23,775,794
1 for 9.................................... 153,957,202 2,910,050 126,207 23,775,794
1 for 10................................... 154,012,492 2,867,175 113,792 23,775,794
The text of the matters referred to under this Item 4 is set forth in the Proxy
Statement dated August 6, 2001 previously filed with the Commission and
incorporated herein by reference.
ITEM 6 Exhibits and Reports on Form 8-K
The following exhibits are filed as part of this report:
(4) Instruments defining the rights of security holders, including
indentures
(v) The Corporation hereby agrees to furnish to the Commission,
upon request, a copy of any instruments defining the rights of
security holders issued by EasyLink Services Corporation or
its subsidiaries.
(99) Additional Exhibits
(1) Modification agreement dated as June 1, 2001 by and between
AT&T Corp. and EasyLink Services Corporation.
(2) Modification agreement dated as June 1, 2001 by and among
Leasing Technologies International, Inc. and EasyLink Services
Corporation.
Reports on Form 8-K - EasyLink Services Corporation filed one report on Form 8-K
during the three months ended September 30, 2001.
The report dated July 17, 2001, reported that pursuant to an Exchange
Agreement Amendment between the Company and the holders of shares of Series A
Convertible Exchangeable Preferred Stock of the Company's majority-owned
subsidiary India.com, Inc., the holders of 99.3% of the outstanding shares of
India Preferred Stock have exercised their right to exchange their shares of
India Preferred Stock for shares of the Company's Class A common stock. The
Company has 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 warrants to purchase an aggregate of 1 million shares of the
Company's Class A common stock issued to India.com.
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ITEM 7
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report on Form 10-Q to be signed on its behalf
by the undersigned thereto duly authorized.
EasyLink Services Corporation
/s/ DEBRA MCCLISTER
-------------------
Debra McClister
Executive Vice President and
Chief Financial Officer
November 14, 2001
47
EXHIBIT INDEX
(4) Instruments defining the rights of security holders, including
indentures
(v) The Corporation hereby agrees to furnish to the Commission,
upon request, a copy of any instruments defining the rights of
security holders issued by EasyLink Services Corporation or
its subsidiaries.
(99) Additional Exhibits
(1) Modification agreement dated as June 1, 2001 by and between
AT&T Corp. and EasyLink Services Corporation.
(2) Modification agreement dated as June 1, 2001 by and among
Leasing Technologies International, Inc. and EasyLink Services
Corporation.
48