Back to GetFilings.com
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 March 31, 2003
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.)
33 Knightsbridge Road, Piscataway, NJ 08854
(Address of Principal Executive Office) (Zip Code)
(732) 652-3500
(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 |_|
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2).
Yes [ ] No [X]
Common stock outstanding at May 1, 2003: Class A common stock $0.01 par value
41,938,720 shares, and Class B common stock $0.01 par value 1,000,000 shares.
EASYLINK SERVICES CORPORATION
MARCH 31, 2003
FORM 10-Q
INDEX
Page
Number
------
PART I: FINANCIAL INFORMATION
Item 1: Condensed Consolidated Financial Statements:
Condensed Consolidated Balance Sheets as of March 31,
2003 (unaudited) and December 31, 2002......................................................... 3
Unaudited Condensed Consolidated Statements of Operations for the
three months ended March 31, 2003 and 2002..................................................... 4
Unaudited Condensed Consolidated Statements of Cash Flows for the
three months ended March 31, 2003 and 2002..................................................... 5
Notes to Unaudited Interim Condensed Consolidated Financial Statements......................... 7
Item 2: Management's Discussion and Analysis of Financial Condition and Results of Operations.......... 12
Item 3: Qualitative and Quantitative Disclosure about Market Risk...................................... 16
Item 4: Controls and Procedures........................................................................ 31
PART II: OTHER INFORMATION
Item 1: Legal Proceedings.............................................................................. 32
Item 2: Changes in Securities and Use of Proceeds...................................................... 32
Item 6: Exhibits and Reports on Form 8-K............................................................... 32
Signatures................................................................................................ 34
Certifications
Exhibits
2
Easylink Services Corporation
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share data)
March 31, December 31,
2003 2002
---------- ----------
(unaudited) Note 1(b)
ASSETS
Current assets:
Cash and cash equivalents .................................................................... $ 8,146 $ 9,554
Accounts receivable, net of allowance for doubtful accounts
$7,557 and $8,052 as of March 31, 2003 and December 31, 2002, respectively ................ 12,473 11,938
Prepaid expenses and other current assets .................................................... 2,269 2,019
--------- ---------
Total current assets ......................................................................... 22,888 23,511
--------- ---------
Property and equipment, net .................................................................. 14,721 14,833
Goodwill, net ................................................................................ 6,266 6,266
Other intangible assets, net ................................................................. 13,743 14,548
Other assets ................................................................................. 1,721 1,853
--------- ---------
Total assets ................................................................................. $ 59,339 $ 61,011
========= =========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable ............................................................................. $ 13,052 $ 10,235
Accrued expenses ............................................................................. 20,410 20,853
Restructuring reserves payable ............................................................... 2,214 2,362
Current portion of capital lease obligations ................................................. 354 413
Current portion of notes payable ............................................................. 4,571 4,152
Current portion of capitalized interest on notes payable ..................................... 4,610 4,283
Deferred revenue ............................................................................. 445 616
Other current liabilities .................................................................... 590 563
Net liabilities of discontinued operations ................................................... 67 360
--------- ---------
Total current liabilities .................................................................... 46,313 43,837
--------- ---------
Capital lease obligations, less current portion .............................................. 138 196
Capitalized interest on notes payable, less current portion .................................. 6,390 7,402
Notes payable, less current portion .......................................................... 63,907 71,398
--------- ---------
Total liabilities ............................................................................ 116,748 122,833
--------- ---------
Stockholders' deficit:
Common stock, $0.01 par value; 510,000,000 shares authorized at March 31, 2003 and
December 31, 2002, respectively:
Class A--500,000,000 shares authorized at March 31, 2003 and December 31,
2002; 17,564,164 and 16,129,318 shares issued and outstanding at March 31,
2003 and
December 31, 2002, respectively ........................................................... 176 161
Class B--10,000,000 shares authorized at March 31, 2003 and December 31, 2002,
respectively, 1,000,000 issued and outstanding at March 31, 2003 and December 31, 2002 .... 10 10
Additional paid-in capital ................................................................... 538,256 537,544
Accumulated other comprehensive income (loss) ................................................ 143 (246)
Accumulated deficit .......................................................................... (595,994) (599,291)
--------- ---------
Total stockholders' deficit .................................................................. (57,409) (61,822)
--------- ---------
Commitments and contingencies
Total liabilities and stockholders' deficit .................................................. $ 59,339 $ 61,011
========= =========
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)
Three Months Ended March 31,
-----------------------------
2003 2002
------------ -------------
Revenues ..................................................................... $ 25,742 $ 30,305
Cost of revenues ............................................................. 13,707 15,872
------------ ------------
Gross profit ................................................................. 12,035 14,433
------------ ------------
Sales and marketing .......................................................... 5,383 5,312
General and administrative ................................................... 6,740 7,272
Product development .......................................................... 1,955 1,773
Amortization of intangible assets ............................................ 517 1,689
------------ ------------
14,595 16,046
------------ ------------
Loss from operations ......................................................... (2,560) (1,613)
------------ ------------
Other income (expense):
Interest income .............................................................. 19 112
Interest expense ............................................................. (754) (1,160)
Gain on debt restructurings and settlements .................................. 6,640 --
Other, net ................................................................... (43) 9
------------ ------------
Total other income (expense), net ............................................ 5,862 (1,039)
------------ ------------
Net income (loss) ............................................................ $ 3,302 $ (2,652)
============ ============
Basic and diluted net income (loss) per share:
Net income (loss) ........................................................ $ 0.19 $ (0.16)
============ ============
Weighted-average basic and diluted shares outstanding ........................ 17,569,987 16,166,200
============ ============
See accompanying notes to unaudited condensed consolidated
financial statements.
4
EasyLink Services Corporation
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(unaudited)
Three Months Ended March 31,
----------------------------
2003 2002
----------- -----------
Cash flows from operating activities:
Net income (loss) ............................................................................. $ 3,302 $ (2,652)
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating
activities:
Non-cash interest ............................................................................. 120 1,130
Depreciation and amortization ................................................................. 2,412 2,493
Amortization of intangible assets ............................................................. 806 2,032
Provision for doubtful accounts ............................................................... 126 752
Gain on debt restructuring and settlements .................................................... (6,640) --
Other ......................................................................................... 41 97
Changes in operating assets and liabilities:
Accounts receivable, net ................................................................... (661) 2,450
Prepaid expenses and other current assets .................................................. (249) (581)
Other assets ............................................................................... 64 74
Accounts payable, accrued expenses and other current liabilities ........................... 2,189 (6,575)
Deferred revenue ........................................................................... (171) (164)
-------- --------
Net cash provided by (used in) operating activities ........................................... 1,339 (944)
-------- --------
Cash flows from investing activities:
Purchases of property and equipment, including capitalized software ........................... (2,301) (783)
-------- --------
Net cash used in investing activities ......................................................... (2,301) (783)
-------- --------
Cash flows from financing activities:
Issuance of shares to employee benefit plans .................................................. 107 100
Payments under capital lease obligations ...................................................... (117) (209)
Interest payments on restructured notes ....................................................... -- (362)
Payments of notes payable ..................................................................... (824) --
-------- --------
Net cash used in financing activities ......................................................... (834) (471)
-------- --------
Effect of foreign exchange rate changes on cash and cash equivalents .......................... 388 145
Net decrease in cash and cash equivalents ..................................................... (1,408) (2,053)
Cash used in discontinued operations .......................................................... -- (300)
Cash and cash equivalents at beginning of the period ....................................... 9,554 13,278
-------- --------
Cash and cash equivalents at the end of the period ............................................ $ 8,146 $ 10,925
======== ========
Supplemental disclosure of non-cash information:
During the three months ended March 31, 2003 and 2002, the Company paid
approximately $120,000 and $1.3 million, respectively, for interest.
During the three months ended March 31, 2003, the Company issued shares of Class
A common stock as follows:
The Company issued 210,479 shares of Class A common stock valued at
approximately $120,000 as payment for interest in lieu of cash (see
Note 2).
5
The Company issued 154,184 shares of Class A common stock valued at
approximately $107,000 in connection with matching contributions to its
401(k) plan.
The Company issued 1,070,183 shares of Class A common stock valued at
approximately $501,000 in connection with the cancellation of debt.
(See Note 2).
During the three months ended March 31, 2002, the Company issued shares of Class
A common stock as follows:
The Company issued 56,075 shares of Class A common stock valued at
approximately $314,000 in connection with the divestiture of a
subsidiary of the Company's India.com subsidiary.
The Company issued 36,232 shares of Class A common stock valued at
approximately $203,000 in connection with the settlement of an
indemnification obligation arising out of the sale of Asia.com's
eLong.com business, a subsidiary of World.com. The indemnification
obligation arose out of a contingent payment obligation owed by
eLong.com to the sellers of a business purchased by eLong.com .
The Company issued 11,549 shares of Class A common stock valued at
approximately $73,000 in payment of a bonus to an employee.
The Company issued 21,016 shares of Class A common stock valued at
approximately $78,000 to a consultant in payment of consulting fees.
Non-cash financing activities:
During the three months ended March 31, 2002, the Company issued 100,000 shares
of Class A common stock in a private placement.
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
The Company offers a broad range of information exchange services to businesses
and service providers, including transaction delivery and management services
such as electronic data interchange or "EDI," production messaging services
utilizing email, fax and telex; integrated desktop messaging services; document
capture and management services and services that protect corporate e-mail
systems such as virus protection, spam control and content filtering services.
(b) Unaudited Interim Condensed Consolidated Financial Information
The accompanying interim condensed consolidated financial statements as of March
31, 2003 and for the three months ended March 31, 2003 and 2002 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 Services as of
March 31, 2003 and the consolidated results of operations and cash flows for the
interim periods ended March 31, 2003 and 2002. 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, 2002 has been derived from audited
consolidated financial statements at that date.
For each of the years ended December 31, 2002, 2001 and 2000, the Company
received a report from its independent accountants containing an explanatory
paragraph stating that the Company suffered recurring losses from operations
since inception and has a working capital deficiency that raises substantial
doubt about the Company's ability to continue as a going concern. The 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 the
Company be unable to continue as a going concern. Management believes the
Company's ability to continue as a going concern is dependent upon its ability
to generate sufficient cash flow to meet its obligations on a timely basis, to
obtain additional financing or refinancing as may be required, to restructure or
eliminate its remaining indebtedness for borrowed money and ultimately to
achieve profitable operations. As part of this process, management is continuing
its efforts to further reduce total operating costs. In addition, the Company
recently announced that it was actively seeking to eliminate substantially all
of its outstanding indebtedness and, pursuant to those efforts, the Company
eliminated $7.1 million in principal amount of debt during the quarter ended
March 31, 2003 in exchange for $0.8 million in cash and the issuance of 1.1
million shares of Class A common stock valued at $0.5 million. Subsequent to
March 31, 2003, the Company also eliminated $54.6 million of indebtedness in
exchange for $2.3 million in cash and the issuance of 22.3 million shares of
Class A common stock valued at $12.1 million. The Company also entered into
agreements to repay an outstanding note in the principal amount of $115,000 and
accrued interest obligations in the aggregate amount of $959,000 over the next
three years, which accrued interest obligations include $284,000 due to George
Abi Zeid, a director and officer of the Company and the former sole shareholder
of STI. (See Note 4 "Subsequent Events").
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, 2002 as included in the Company's Form 10-K filed with
the Securities and Exchange Commission on March 31, 2003.
7
(c) Principles of Consolidation and Basis of Presentation
The consolidated financial statements include the accounts of the Company and
its wholly-owned or majority-owned subsidiaries from the dates of acquisition.
All other investments the Company does not have the ability to control or
exercise significant influence are accounted for under the cost method. The
interest of shareholders other than those of EasyLink is recorded as minority
interest in the accompanying consolidated statements of operations and
consolidated balance sheets. When losses applicable to minority interest holders
in a subsidiary exceed the minority interest in the equity capital of the
subsidiary, these losses are included in the Company's results, as the minority
interest holder has no obligation to provide further financing to the
subsidiary. All significant intercompany accounts and transactions have been
eliminated in consolidation.
The net liabilities of WORLD.com, a wholly owned subsidiary, and its majority
owned subsidiaries, are reported as discontinued operations in the consolidated
balance sheets as of March 31, 2003 and 2002 as a result of the sale or
discontinuance of the operations of this business in 2001.
Effective January 23, 2002, the Company authorized and implemented a 10-for-1
reverse stock split of all issued and outstanding stock. Accordingly, all issued
and outstanding share and per share amounts in the accompanying consolidated
financial statements that predate the reverse stock split have been
retroactively restated to reflect the reverse stock split.
(d) Use of Estimates
The preparation of financial statements in accordance with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities, the disclosure of contingent assets and liabilities and the
reported amounts of revenues and expenses. These estimates and assumptions
relate to the estimates of collectibility of accounts receivable, the
realization of goodwill and other intangibles, accruals and other factors.
Actual results could differ from those estimates.
(e) Accounting for Impairment of Long-Lived and Intangible Assets
Effective January 1, 2002, we adopted SFAS No. 142, "Goodwill and Other
Intangible Assets" and SFAS No. 144, "Accounting for the Impairment or Disposal
of Long-Lived Assets". SFAS 142 eliminates the amortization of goodwill and
indefinite-lived intangible assets, addresses the amortization of intangible
assets with finite lives and addresses impairment testing and recognition for
goodwill and intangible assets. SFAS No. 144 establishes as single model for the
impairment of long-lived assets. We assess goodwill for impairment annually
unless events or changes in circumstances indicate that the carrying amount of
an asset may not be recoverable. Discounted cash flow analyses are used to
assess nonamortizable intangible impairment while undiscounted cash flow
analyses are used to assess long-lived asset impairment. If an assessment
indicates an impairment, the impaired asset is written down to its fair market
value based on the best information available. Estimated fair market value is
generally measured with discounted estimated cash flows. Considerable management
judgement is necessary to estimate undiscounted and discounted future cash
flows. Assumptions used for these cash flows are consistent with internal
forecasts. On an on-going basis, management reviews the value and period of
amortization or depreciation of long-lived assets, including goodwill and other
intangible assets. During this review, we reevaluate the significant assumptions
used in determining the original cost of long-lived assets. Although the
assumptions may vary from transaction to transaction, they generally include
revenue growth, operating results, cash flows and other indicators of value.
Management then determines whether there has been 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.
(f) Revenue Recognition
The Company's information exchange services include transaction delivery and
management services such as electronic data interchange or "EDI," production
messaging services utilizing email, fax and telex; integrated desktop messaging
services; document capture and management services; and services that protect
corporate e-mail systems such as virus protection, spam control and content
filtering services. The Company derives revenues from monthly per-message and
usage-based charges for its transaction delivery and management services; from
monthly per-user or per-message fees for managed e-mail and groupware hosting
and virus protection, spam control and content filtering services, and license
and consulting fees for our professional services. Revenue from services is
recognized as the services are performed.
8
Facsimile license revenue is recognized over the average estimated customer life
of 3 years. The Company also licenses software under noncancellable license
agreements. License fee revenues are recognized when a noncancellable license
fee is in force, the product has been delivered and accepted, the license fee is
fixed, vendor specific objective evidence exists for the undelivered element and
collectibility is reasonably assured. Maintenance and support revenues are
deferred and recognized ratably over the term of the related agreements. The
Company also may host the software if requested by the customer. The customer
has the option to decide who hosts the application. If the Company provides the
hosting, revenue from hosting is ratably recognized over the hosting periods.
Pursuant to Emerging Issues Task Force 00-3, "Application of AICPA Statement of
Position 97-2 to Arrangements That Include the Right to Use Software on Another
Entity's Hardware", if 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.
The Company also enters into supplier arrangements providing bulk services, at a
fixed price and minimum quantity to certain customers for a specified period of
time. Revenues earned under such arrangements are recognized over the term of
the arrangement assuming collection of the resultant receivable is probable.
Deferred revenue represents payments that have been received in advance of the
services being performed.
Other revenues include revenues from (i) the sale of domain names, which are
recognized at the time when the ownership of the domain name is transferred
provided that no significant Company obligation remains and collection of the
resulting receivable is probable and (ii) the licensing of domain names wherein
revenue is recognized ratably over the license period. To date, such revenues
have not been material.
(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, accounts receivable, notes payable and convertible notes payable.
At March 31, 2003 and December 31, 2002, the fair value of cash, cash
equivalents, restricted investments and accounts receivable approximated their
financial statement carrying amount because of the short-term maturity of these
instruments. The recorded values of notes payable and convertible notes payable
approximate their fair values, as interest approximates market rates with the
exception of the Convertible Subordinated Notes payable with a carrying value of
$22.1 million and $24.1 million at March 31, 2003 and December 31, 2002,
respectively, which had an estimated fair value of $5.5 million and $6.0 million
at March 31, 2003 and December 31, 2002, respectively, based upon quoted market
prices.
Credit is extended to customers based on the evaluation of their financial
condition and collateral is not required. The Company performs ongoing credit
assessments of its customers and maintains an allowance for doubtful accounts.
No single customer exceeded 10% of either total revenues or accounts receivable
as of and for the three months ended March 31, 2003. Revenues from the Company's
five largest customers accounted for an aggregate of 8% and 6% of the Company's
total revenues for the three months ended March 31, 2003 and 2002, respectively.
(h) Basic and Diluted Net Income (Loss) Per Share
Net income (loss) per share is presented in accordance with the provisions of
SFAS No. 128, "Earnings Per Share", and the Securities and Exchange Commission
Staff Accounting Bulletin No. 98. Under SFAS No. 128, basic Earnings per Share
("EPS") excludes dilution for common stock equivalents and is computed by
dividing income or loss available to common shareholders by the weighted average
number of common shares outstanding for the period. Diluted EPS reflects the
potential dilution that could occur if securities or other contracts to issue
common stock were exercised or converted into common stock and resulted in the
issuance of common stock. Diluted net income (loss) per share for the three
months ended March 31, 2003 and 2002 is equal to basic net income (loss) per
share since all common stock equivalents are anti-dilutive for each of the
periods presented.
At March 31, 2003 and 2002, the Company had common stock equivalents of
approximately 4.8 million and 8.2 million shares respectively, related to stock
options, warrants and convertible debt, that were not included in the
computation of net loss per share because they were antidilutive.
9
(i) Stock Based Compensation
In December 2002, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 148, "Accounting for Stock-Based Compensation
- - Transition and Disclosure" ("SFAS 148"). SFAS 148 provides alternative methods
of transition for a voluntary change to the fair value method of accounting for
stock-based employee compensation as originally provided by SFAS No. 123
"Accounting for Stock-Based Compensation". Additionally, SFAS 148 amends the
disclosure requirements of SFAS No. 123 to require prominent disclosure in both
the annual and interim financial statements about the method used in reporting
results. The transitional requirements of SFAS No. 148 are effective for all
financial statements for fiscal years ending after December 31, 2002. We adopted
the disclosure portion of this statement for the current fiscal quarter ended
March 31, 2003. The application of the disclosure portion of this standard will
have no impact on the Company's consolidated financial position or results of
operations. The Financial Accounting Standards Board recently indicated that
they will require stock-based employee compensation to be recorded as a charge
to earnings beginning in 2004. The Company will continue to monitor its progress
on the issuance of this standard as well as evaluate its position with respect
to current guidance.
As allowed by SFAS No. 123, Accounting for Stock-Based Compensation, as amended
by SFAS No. 148, the Company has retained the compensation measurement
principles of Accounting Principles Board (APB) Opinion No. 25, Accounting for
Stock Issued to Employees, and its related interpretations for stock options.
SFAS No. 148 also requires more prominent and more frequent disclosures in both
interim and annual financial statements about the method of accounting for
stock-based compensation and the effect of the method used on reporting results.
The Company adopted the disclosure provisions of SFAS No. 148 as of December 31,
2002 and continue to apply the measurement provisions of APB 25. Under APB
Opinion No. 25, compensation expense is recognized based upon the difference, if
any, at the measurement date between the market value of the stock and the
option exercise price. The measurement date is the date at which both the number
of options and the exercise price for each option are known. The following table
illustrates the effect on net income (loss) and net income (loss) per share if
the Company had applied the fair value recognition provisions of SFAS No. 123 to
stock-based employee compensation.
($ in thousands, except per share amounts) Quarter ended March 31,
-----------------------
2003 2002
------- --------
Net income (loss):
As reported.................................. $3,302 $(2,625)
Pro forma.................................... $ 150 $(5,470)
Basic and diluted net income (loss) per share:
As reported.................................. $ 0.19 $ (0.16)
Pro forma.................................... $ 0.01 $ (0.34)
The resulting effect on the pro forma net income (loss) disclosed for the
quarter ended March 31, 2003 and 2002 is not likely to be representative of the
effects of the net income (loss) on a pro forma basis in future years, because
the pro forma results include only the impact of grants issued to date and
related vesting, while subsequent years will include additional grants and
vesting. For purposes of pro-forma disclosure, the estimated fair value of the
options is amortized to expense over the options' vesting period.
(j) Comprehensive Income (Loss)
The components of comprehensive income (loss) consist of the following:
For the three months
ended March 31,
----------------------
2003 2002
------- -------
Net income (loss) $ 3,302 $(2,652)
Other comprehensive gain:
Foreign currency translation
adjustments 388 145
------- -------
Comprehensive Income (loss) $ 3,690 $(2,507)
======= =======
Accumulated other comprehensive income (loss) at March 31, 2003 and December 31,
2002 solely consists of foreign currency translation adjustments.
(k) Recent Accounting Pronouncements
In November 2002, the FASB issued FIN 45, "Guarantor's Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of
Others." FIN 45 elaborates on the existing disclosure requirements for most
guarantees, including residual value guarantees issued in conjunction with
operating lease agreements. It also clarifies that at the time a company issues
a guarantee the company must recognize an initial liability for the fair value
of the obligation it assumes under that guarantee and must disclose that
information in its interim and annual financial statements. The initial
recognition and measurement provisions apply on a prospective basis to
guarantees issued or modified after December 31, 2002. The disclosure
requirements are effective for financial statements or interim or annual periods
ending after December 15, 2002. the adoption of FIN 45 did not have a
significant impact on our financial position and results of operations.
In January 2003, the FASB issued FIN 46, "Consolidation of Variable Interest
Entities." FIN 46 requires a variable interest entity to be consolidated by a
company if that company is subject to a majority of the risk of loss from the
variable interest entity's activities or entitled to receive a majority of the
entity's residual returns or both. A variable interest entity is a corporation,
partnership, trust, or any other legal structures used for business purposes
that either (a) does not have equity investors with voting rights or (b) has
equity investors that do not provide sufficient financial resources for the
entity to support its activities. A variable interest entity often holds
financial assets, including loans or receivables, real estate or other property.
A variable interest entity may be essentially passive or it may engage in
research and development or other activities on behalf of another company. The
consolidation requirements of FIN 46 apply immediately to variable interest
entities created after January 31, 2003. The consolidation requirements apply to
older entities in the first fiscal year or interim period beginning after June
15, 2003. Certain of the disclosure requirements apply to all financial
statements issued after January 31, 2003, regardless of when the variable
interest entity was established. The Company has evaluated the impact of FIN 46
and does not believe that it has any investment in variable interest entities.
(2) Notes Payable
During the quarter ended March 31, 2003, the Company entered into separate
transactions with debt holders eliminating $7.1 million in indebtedness
including $2.0 million of 7% Convertible Subordinated Notes, due February 2005,
$2.6 million of 10% Senior Convertible Notes, due January 2006, $2.0 million of
12% Restructure Notes due in 13 quarterly payments beginning June 2003 and $0.5
million of Restructuring balloon payments due October 2004. The Company paid the
debt holders $786,000 in cash and issued 1.1 million shares of Class A common
stock valued at $501,000 in connection with the transactions. After including
the reversal of $685,000 in capitalized interest, $227,000 of accrued interest,
debt issuance costs of $26,000 related to certain of the eliminated
indebtedness, the Company recorded total gains of $6.6 million on the
elimination of debt in the quarter. (See Note 4 Subsequent Events -
Restructuring and Settlement of Certain Debt).
10
Notes payable include the following, in thousands
March 31, 2003 December 31, 2002
------------------------ ----------------------
Capitalized Capitalized
Interest Principal Interest Principal
----------- ----------- ----------- ---------
2000 7% Convertible Subordinated Notes due February 2005 $ -- $22,095 $ -- $24,095
2001 10% Senior Convertible Notes due January 2006 4,843 28,484 5,528 31,059
2001 12% AT&T restructure note due in 13 quarterly payments
beginning June 2003 5,160 10,000 5,160 10,000
2001 12% note payable to former shareholder of STI due in 13 quarterly
payments beginning June 2003 997 2,683 997 2,683
2001 12% Restructure notes due in 13 quarterly payments
beginning June 2003 -- 4,130 -- 6,132
2001 Restructuring balloon payments due October 2004 -- 370 -- 795
Other -- 716 -- 786
------- ------- ------- -------
Total notes payable and capitalized interest 11,000 68,478 11,685 75,550
Less current portion 4,610 4,571 4,283 4,152
------- ------- ------- -------
Non current portion $ 6,390 $63,907 $ 7,402 $71,398
======= ======= ======= =======
(3) Commitments and Contingencies
Master Carrier Agreement
In connection with the acquisition of the EasyLink Services business from AT&T
Corp., the Company entered into a Master Carrier Agreement with AT&T. Under this
agreement, AT&T will provide the Company with a variety of telecommunications
services that are required in connection with the provision of the Company's
services. The term of the agreement for network connection services is 36 months
through May 2005 and the term of the agreement for private line and satellite
services is 36 months through February 2004. Under the agreement, the Company
has a minimum revenue commitment for network connection services equal to $3
million for each of the three years of the contract. In addition, we have a
minimum revenue commitment for private line and satellite services equal to
$375,000 per month during the three-year term. If the Company terminates the
network connection services or the private line and satellite services prior to
the term or AT&T terminates the services for our breach, the Company must pay to
AT&T a termination charge equal to 50% of the unsatisfied minimum revenue
commitment for these services for the period in which termination occurs plus
50% of the minimum revenue commitment for each remaining commitment period in
the term.
Other Telecommunications Services
The Company has committed to purchase from MCI Worldcom a minimum of $75,000 per
month in other telecommunications services through January 2005.
Legal Proceedings
On February 27, 2003, PTEK Holdings, Inc., ("PTEK") one of the Company's
principal competitors, announced that it had entered into an agreement with AT&T
to purchase 1,423,980 shares of outstanding Class A common stock of the Company
held by AT&T and a $10 million promissory note of the Company held by AT&T. In
response to PTEK's announcement, the Company commenced on March 17, 2003 an
action against AT&T, PTEK, and PTEK's subsidiary, Xpedite Systems, Inc. The suit
seeks, among other things, to enjoin AT&T from selling the promissory note held
by AT&T to PTEK, to compel AT&T to participate in the Company's current debt
restructuring and to enjoin PTEK and Xpedite Systems, Inc. from contacting the
Company's creditors and making false statements to the Company's customers and
creditors regarding the Company and its financial position. The Court ordered
limited document discovery and established a timetable for considering
EasyLink's motion, including an oral argument hearing on May 1, 2003. The
hearing has been rescheduled for May 22, 2003. AT&T Corp. and PTEK have filed a
motion to dismiss EasyLink's complaint or, alternatively, to transfer the action
to the Law Division. No assurance can be given as to the outcome of this matter.
11
(4) Subsequent Events - Restructuring and Settlement of Certain Debt
Subsequent to March 31, 2003 and through the date hereof, the Company entered
into a series of transactions with debt holders to eliminate a total of $54.6
million of indebtedness in exchange for cash payments of $2.3 million and, the
issuance of 22.3 million shares of Class A common stock valued at $12.1 million.
The eliminated debt includes $19.8 million of 7% Convertible Subordinated Notes,
due February 2005, $28.5 million of 10% Senior Convertible Notes, due January
2006, a $2.6 million note payable to the former shareholder of STI (who is an
officer and director of the Company), $3.2 million of Restructure notes due in
13 quarterly payments beginning in June 2003 and $0.5 million in other
indebtedness. The Company also entered into agreements to repay an outstanding
note in the principal amount of $115,000 and accrued interest obligations in the
aggregate amount of $959,000 over the next three years, which accrued interest
includes $284,000 due to George Abi Zeid, a director and officer of the Company
and the former sole shareholder of STI. These transactions will result in a gain
of approximately $47 million that the Company will record in the second quarter
of 2003 after also eliminating $5.8 million of previously capitalized interest
$2.4 million of accrued interest, and $0.3 million of debt issuance costs on the
eliminated notes. Also, the transactions relating to the previous $115,000 note
and $959,000 of accrued interest shall be accounted for in accordance with
Financial Accounting Standards Board Statement No. 15, Accounting by Debtors and
Creditors for Troubled Debt Restructurings."
To partially fund a portion of the cash used in the debt elimination
transactions, the Company issued 1.9 million shares of Class A common stock in a
private placement to Federal Partners L.P. in exchange for $1.0 million.
The elimination of outstanding debt will result in substantial income from
cancellation of debt for income tax purposes. The Company intends to minimize
its income tax payable as a result of the restructuring by, among other things,
offsetting the income with its historical net operating losses and otherwise
reducing the income in accordance with applicable income tax rules. As result,
the Company does not expect to incur any material current income tax liability
as a result of the elimination of this debt. However, the relevant tax
authorities may challenge the Company's income tax positions. No assurance can
be given that the Company will be able to offset or otherwise reduce all or any
of the cancellation of debt income resulting from the elimination of debt in the
second quarter of 2003. If the Company is not able to offset or otherwise reduce
the cancellation of debt income, the Company may incur material income tax
liabilities as a result of the elimination of debt and the Company may, be
unable to pay these liabilities.
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
We are a provider of services that power the electronic exchange of information
between enterprises, their trading communities and their customers. Every
business day, we handle over 800,000 transactions that are integral to the
movement of money, materials, products and people in the global economy such as
insurance claims, trade and travel confirmations, purchase orders, invoices,
shipping notices and funds transfers, among many others. We offer a broad range
of information exchange services to businesses and service providers, including
electronic data interchange services or "EDI"; production messaging services;
integrated desktop messaging services; document capture and management services;
boundary and managed email services; and other services largely consisting of
legacy real time fax services.
For the three months ended March 31, 2003, total revenues were $25.7 million
compared to $30.3 million for the three months ended March 31, 2002. Almost 100%
of our revenues in both 2003 and 2002 were generated from companies we acquired
prior to January 1, 2002.
Net income was $3.3 million for the three months ended March 31, 2003 as
compared to a net loss of $2.7 million for the three months ended March 31,
2002. The 2003 results included gains on debt settlements of $6.6 million.
12
We derive revenues primarily from monthly per-message and usage-based charges
for our EDI, production messaging and integrated desktop messaging services; and
monthly per-user or per-message fees for managed e-mail and groupware hosting
services and virus protection, spam control and content filtering services. Our
services generate revenue in a number of different ways. We charge our EDI
customers per message. Customers of our production messaging services pay
consulting fees based upon the level of integration work and set-up requirements
plus per-page or per-minute usage charges, depending on the delivery method, for
all messages successfully delivered by our network. Customers who purchase our
integrated desktop messaging services pay initial site license fees based on the
number of user seats being deployed plus per page usage charges for all faxes
successfully delivered by our network. For our e-mail and groupware hosting
services, customers are billed monthly based upon the number of mailboxes set up
and for additional features that they may purchase. For our virus protection,
spam and content filtering services, we charge customers either a monthly fee
per user or per message charges. Revenue from services is recognized as the
services are performed. Facsimile software license revenue is recognized over
the average estimated customer life of 3 years.
In light of 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. However, we do believe
that the our revenues and operating results in future periods will be more
comparable to the results for the three months ended March 31, 2003.
We have experienced declines in revenues for the three months period ended March
31, 2003 as compared to the comparable period ended March 31, 2002. See "Results
Of Operations Three Months Ended March 31, 2003 and 2002." The decrease
primarily occurred in our production messaging services, which include fax,
telex and email hosting, as a result of lower volumes and negotiated customer
price reductions. We expect that the declines in revenues from production
messaging services may continue in the future. Our strategy to grow revenues and
to mitigate the effects of this decline includes the sale of existing and new
services to our large base of existing customers, as well as offering our
services to new customers. Among the new services that we have recently
introduced are trading community enablement services such as Web EDI and
document capture and management services. See "Item 1. Business - Our Business
Services" contained in our Form 10K filed March 31, 2003.
Our prospects should be considered in light of risks described in the section of
this report entitled "Risk Factors That May Affect Future Results."
Critical Accounting Policies
In response to the Securities & Exchange Commission's (SEC) Release No. 33-8040,
"Cautionary Advice Regarding Disclosure About Critical Accounting Policies," we
have identified the most critical accounting principles upon which our financial
status depends. Critical principles were determined by considering accounting
policies that involve the most complex or subjective decisions or assessments.
The most critical accounting policies were identified to be those related to
revenue recognition, accounts receivable, impairment of long lived assets,
contingencies and litigation and restructuring activities.
Results of operations three months ended March 31, 2003 and 2002
Revenues
Revenues for the three months ended March 31, 2003 were $25.7 million, as
compared to $30.3 million for the comparable period in 2002. The decrease of
$4.6 million was due primarily to reduced revenues in our production messaging
services, which include fax, telex and email hosting, as a result of lower
volumes and negotiated customer price reductions. Revenues in the 2003 and 2002
quarters consist almost entirely of revenues from providing information exchange
services to businesses and are derived from electronic data interchange services
or `EDI"; production messaging services; integrated desktop messaging services;
boundary and managed email services; and other services largely consisting of
legacy real time fax services.
13
Cost of Revenues
Cost of revenues for the three months ended March 31, 2003 decreased to $13.7
million as compared to $15.9 million for the comparable period in 2002. However,
as a percentage of revenues these costs increased to 53.2% in the 2003 quarter
as compared to 52.3% of revenues in the comparable 2002 quarter. The reduction
in costs resulted from continuing cost reduction programs and reduced variable
telecom charges consistent with reduced customer volumes. Costs increased as a
percentage of revenues because of the fixed network expenses and fixed telecom
facilities costs included in costs of revenues in comparison to a decrease in
revenues from period to period.
Cost of revenues consists primarily of costs incurred in the delivery and
support of our services, including depreciation of equipment used in our
computer systems, the cost of telecommunications services including local access
charges, leased network backbone circuit costs and long distance domestic and
international termination charges, and personnel costs associated with our
systems and databases as well as our e-mail service.
Sales and Marketing Expenses
Sales and marketing expenses were $5.4 million and $5.3 million for the three
months ended March 31, 2003 and 2002, respectively. The marginal increase in
these expenses reflects the continued sales and marketing efforts to support our
new services and to offset the decrease in revenues experienced in the most
recent quarter. Included in this category are costs related to salaries and
commissions for sales, marketing, and business development personnel. Also
included are costs for promotional programs, trade shows and marketing
materials.
General and Administrative Expenses
General and administrative expenses were $6.7 million during the three months
ended March 31, 2003 as compared to $7.3 million during the comparable period of
2002. The $0.6 million decrease is the net impact of various cost component
changes but the most significant from period to period was a reduction of $0.6
million in our provision for bad debts as a result of improved collection and
credit activities.
Product Development Expenses
Product development costs, which consist primarily of personnel and consultants'
time and expense to research, conceptualize, and test product launches and
enhancements to our products, were $2.0 million for the three months ended March
31, 2003 as compared to $1.8 million in comparable period of 2002. We have
currently increased development spending to continue the enhancements to our
newer products introduced in the second half of 2002.
Amortization of Other Intangible Assets
As of January 1, 2002 the Company adopted FASB No. 142, "Goodwill and Other
Intangibles". Statement No. 142 requires companies to no longer amortize
goodwill but instead test goodwill for impairment on an annual basis.
Accordingly, we did not amortize any goodwill during the three months ended
March 31, 2003 and 2002 respectively. We did an assessment in the 4th quarter of
2002 with the assistance of an independent appraiser and determined that an
impairment of goodwill had occurred. Based on a subsequent fair value analysis
of the Company's goodwill, other intangible assets and other long-lived assets,
we recorded an aggregate impairment of $78.8 million in the 4th quarter of 2002.
The impairment of the other intangible assets reduced the basis for future
amortization charges resulting in the $1.2 million decrease in amortization
charges amounting to $0.5 million in the quarter ended March 31, 2003 as
compared to $1.7 million in the same period of 2002.
Other Income (Expense), Net
Interest income for the three months ended March 31, 2003 was $19,000 as
compared to $112,000 during the comparable period of 2002. The decrease was due
to lower cash balances and lower interest rates on temporary investments.
14
Interest expense was $0.8 million for the three months ended March 31, 2003 as
compared to $1.2 million in the comparable period of 2002. The decrease was
primarily due to reductions in the total debt balances outstanding during the
quarter ended March 31, 2003 as compared to the same quarter in 2002 as a result
of the debt restructurings and settlements completed in the quarter ended March
31, 2003 and the second half of 2002.
Gain on Debt Restructurings and Settlements
In the three months ended March 31, 2003, we eliminated $7.1 million of
indebtedness in exchange for the payment of $786,000 in cash and the issuance of
1.1 million shares of Class A common stock valued at $501,000 pursuant to our
announced efforts to eliminate substantially all of our outstanding
indebtedness. After reversing $685,000 of previously capitalized interest and
$201,000 of accrued interest net of debt issuance costs, we recorded a gain of
$6.6 million on these transactions.
Liquidity and capital resources
Net cash provided by operating activities was $1.3 million for the three months
ended March 31, 2003 in comparison to cash used in operating activities of $0.9
million for the comparable period in 2002. Net income (loss) from period to
period increased by $6.0 million from a loss of $2.7 million in 2002 to income
of $3.3 million in 2003. The cash provided by operating activity increased by
$2.2 million, after accounting for the following 2003 items, which included a
$6.6 million gain on debt restructuring and settlements, a $1.0 million decrease
in non cash interest, a $1.2 million decrease in amortization of intangibles
assets, a $0.6 million decrease in the provision for doubtful accounts, and a
net increase of $5.8 million in cash provided by the changes in operating assets
and liabilities. The $1.0 million decrease in non cash interest was a result of
interest payments being deferred as part of the Company's debt settlement
negotiations. The $1.2 million decrease in amortization of intangible assets in
2003, was due to an impairment charge recorded during the quarter ended
December 31, 2002.
Net cash used in investing activities for purchases of property and equipment
was $2.3 million and $0.8 million for the three months ended March 31, 2003 and
2002, respectively. The expenditures in the 2003 period included $1.1 million
related to our new office and network facility.
Net cash used in financing activities was $0.8 million for the three months
ended March 31, 2003 as compared to cash used of $0.5 million for the three
months ended March 31, 2002. The first quarter of 2003 activity includes $0.8
million in payments to extinguish debt in connection with the previously
mentioned debt elimination transactions while the first quarter 2002 amount
included $0.4 million in interest payments on restructured notes.
At March 31, 2003, we had $8.1 million of cash and cash equivalents. After March
31, 2003 and through the date hereof, we entered into a series of transactions
with debt holders to eliminate a total of $54.6 million of indebtedness in
exchange for cash payments of $2.3 million and the issuance of 22.3 million
shares of Class A common stock valued at $12.1 million. We also entered into
agreements to repay an outstanding note in the principal amount of $115,000 and
accrued interest obligations in the aggregate amount of $959,000 over the next
three years, including $284,000 due to George Abi Zeid, a director and officer
of the Company and the former sole shareholder of STI. To partially fund a
portion of the cash used in the debt elimination transactions, we issued 1.9
million shares of Class A common stock in a private placement in exchange for
$1.0 million. After giving effect to these debt elimination transactions, our
principal commitments consist of $2.3 million in subordinated convertible notes
due in 2005; $12.7 million in principal amount of notes and other obligations
due in installments beginning in June 2003; approximately $3.7 million in
accrued interest obligations payable over one to three years through 2006; and
obligations under capital leases of $592,000; commitments for telecommunications
services.
For the years ended December 31, 2002, 2001 and 2000, we received a report from
our independent accountants containing an explanatory paragraph stating that we
suffered recurring losses from operations since inception and have a working
capital deficiency that raise substantial doubt about our ability to continue as
a going concern. As of March 31, 2003, the Company had a stockholders' net
deficit of $57.4 million and debt obligations of $9.2 million payable within one
year. Although the Company's outstanding debt and stockholders' deficit have
been substantially reduced subsequent to March 31, 2003, the remaining principal
and interest payments due within one year from March 31, 2003, after giving
affect to those subsequent events, amount to $5.8 million. We believe that the
Company may need additional financing to meet this debt service requirement and
other cash requirements for its operations. However, if we are unable to raise
additional financing, restructure or settle additional outstanding debt or
generate sufficient cash flow, we may be unable to continue as a going concern.
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. Management is continuing the process of further reducing
operating costs and increasing its sales efforts. There can be no assurance that
the Company will be successful in these efforts.
15
Sales of additional equity securities could result in additional dilution to our
stockholders. In addition, on an ongoing basis, we continue to evaluate
potential acquisitions to complement our business messaging services. In order
to complete these potential acquisitions, we may need additional equity or debt
financing in the future.
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 continuing
operations in Europe (mostly in England) and, to a lesser extent, in Singapore
and Malaysia. Fluctuations in exchange rates may have an adverse effect on the
Company's results of operations and could also result in exchange losses. The
impact of future rate fluctuations cannot be predicted adequately. To date the
Company has not sought to hedge the risks associated with fluctuations in
exchange rates.
Market Risk - Our accounts receivables are subject, in the normal course of
business, to collection risks. We regularly assess these risks and have
established policies and business practices to protect against the adverse
effects of collection risks. As a result we do not anticipate any material
losses in this area.
Interest Rate Risk - Interest rate risk refers to fluctuations in the value of a
security resulting from changes in the general level of interest rates.
Investments that are classified as cash and cash and equivalents have original
maturities of three months or less. Changes in the market's interest rates do
not affect the value of these investments. 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
We have only a limited operating history and some of our services are in a new
and unproven industry.
We have only a limited operating history upon which you can evaluate our
business and our prospects. Easylink was incorporated under the name Globecomm,
Inc. in 1994 in the State of Delaware. We launched our business by offering a
commercial email service in November 1996 under the name iName. We changed our
company name to Mail.com, Inc. in January 1999. In February 2000, we acquired
NetMoves Corporation, a provider of a variety of transaction delivery services
to businesses. In March 2000, we formed WORLD.com to develop and operate our
domain name properties as independent Web sites. In the fourth quarter of 2000,
we announced our intention to focus exclusively on the business market and to
sell all assets not related to this business. In February 2001, we acquired
Swift Telecommunications, Inc. which had contemporaneously acquired the EasyLink
Services business from AT&T Corp. The EasyLink Services business is a provider
of transaction delivery services such as electronic data interchange or EDI and
production messaging services. Swift was a provider of production messaging
services, principally telex services. On March 30, 2001, we announced that we
had sold our advertising network business to Net2Phone, Inc. and on May 3, 2001
our Asia.com, Inc. subsidiary completed the sale of its business. In October
2001, we sold a subsidiary of India.com, Inc. and have since ceased the conduct
of the portal operations of India.com, Inc. In January 2002, we announced our
strategy to expand our position in the transaction delivery segment of the
electronic commerce market and to begin to offer to our large customer base
related transaction management services that automate more components of our
customers' business processes. In 2002, we commercially introduced two such
services - Trading Community Enablement and Management Services and Document
Capture and Management Services. Our success will depend in part upon our
ability to maintain or expand our sales of transaction delivery services such as
EDI, production messaging and integrated desktop messaging to enterprises, our
ability to successfully develop transaction management services, the development
of a viable market for fee-based transaction delivery and transaction management
services on an outsourced basis and our ability to compete successfully in those
markets. For the reasons discussed in more detail below, there are substantial
obstacles to our achieving and sustaining profitability.
16
We have incurred losses since inception.
We have not achieved profitability in any fiscal year, and we may not be able to
achieve or sustain profitability. We incurred a net loss of $85.8 million for
the year ended December 31, 2002. We had net income of $3.3 million for the
three months ended March 31, 2003; however, this amount included $6.6 million
from a gain on debt restructuring and settlements. We had an accumulated deficit
of $596.0 million as of March 31, 2003. We intend to upgrade and enhance our
technology, continue our international expansion, and improve and expand our
management information and other internal systems. We intend to continue to make
strategic acquisitions and investments where resources permit, which may result
in significant amortization of intangibles and other expenses or a later
impairment charge arising out of the write-off of goodwill booked as a result of
such acquisitions or investments. We are making these expenditures in
anticipation of higher revenues, but there will be a delay in realizing higher
revenues even if we are successful. We have experienced declining revenues for
the year ended December 31, 2002 as compared to the comparable period ended
December 31, 2001 and for the three months period ended March 31, 2003 as
compared to the comparable period ended March 31, 2002. See Part II, Item 7:
Management's Discussion and Analysis of Financial Condition and Results of
Operations contained in our Form 10-K filed March 31, 2003 and Part I, Item 2:
Management's Discussion and Analysis of Financial Condition and Results of
Operations contained herein. If we do not succeed in substantially increasing
our revenues or integrating the EasyLink Services and Swift businesses with our
historical business, our losses may continue.
If we are unable to raise necessary capital in the future, we may be unable to
invest in the growth of our business or fund necessary expenditures.
We may need to raise additional capital in the future. See Part I. Item 2 -
Management's Discussion and Analysis of Financial Condition and Results of
Operations - Liquidity and Capital Resources. At March 31, 2003, we had $8.1
million of cash, cash equivalents and marketable securities. Our principal
commitments consist of subordinated convertible notes, senior convertible notes,
notes payable, obligations under capital leases, accounts payable and other
current obligations, commitments for capital expenditures and commitments for
telecommunications services. For each of the three years ended December 31,
2002, 2001 and 2000, we received a report from our independent accountants
containing an explanatory paragraph stating that we suffered recurring losses
from operations since inception and have a working capital deficiency that raise
substantial doubt about our ability to continue as a going concern. We may need
additional financing to invest in the growth of our business and to pay other
obligations, and the availability of such financing when needed, on terms
acceptable to us, or at all, is uncertain. See "Risk Factors - We have incurred
significant indebtedness for money borrowed, and we may be unable to pay debt
service on this indebtedness." If we are unable to raise additional financing,
generate sufficient cash flow, or restructure our debt obligations before they
become due and payable, we may be unable to continue as a going concern.
If we raise additional funds by issuing equity securities or debt convertible
into equity securities, stockholders may experience significant dilution of
their ownership interest. The amount of dilution resulting from issuance of
additional shares of Class A common stock and securities convertible into Class
A common stock and the potential dilution that may result from future issuances
has significantly increased in light of the decline in our stock price.
Moreover, we could issue preferred stock that has rights senior to those of the
Class A common stock. Some of our stockholders have registration rights that
could interfere with our ability to raise needed capital. If we raise funds by
issuing debt, our lenders may place limitations on our operations, including our
ability to pay dividends.
We have incurred significant indebtedness for money borrowed, and we may be
unable to pay debt service on this indebtedness.
17
After giving effect to the elimination of debt through May 1, 2003, we have
outstanding $2.3 million in subordinated convertible notes due in 2005; $12.7
million in principal amount of notes and other obligations due in installments
beginning in June 2003; approximately $3.7 million in accrued interest
obligations payable over one to three years through 2006; and obligations under
capital leases and commitments for telecommunications services. We currently
have $5.8 million in principal and cash interest payments due during the twelve
month period after March 31, 2003. We had an operating loss and negative cash
flow for the year ended December 31, 2002. In addition, we have a substantial
amount of outstanding accounts payable and other obligations. Accordingly, cash
generated by our operations would have been insufficient to pay the amount of
principal and interest payable annually on our outstanding indebtedness or to
pay our other obligations.
We have eliminated an additional $54.6 million principal amount of indebtedness
since March 31, 2003 and are seeking to eliminate substantially all of our
remaining indebtedness for borrowed money. We cannot assure you that we will be
able to successfully complete the elimination of any other indebtedness that we
are seeking to eliminate on favorable terms or at all. On February 27, PTEK
Holdings, Inc., one of our principal competitors, announced that it had entered
into an agreement with AT&T to purchase 1,423,980 shares of outstanding Class A
common stock of EasyLink held by AT&T and a promissory note in the principal
amount of $10 million of EasyLink held by AT&T. In response to PTEK's
announcement, we commenced on March 17, 2003 an action against AT&T Corp., PTEK
Holdings, Inc. and PTEK's subsidiary Xpedite Systems, Inc. The suit seeks, among
other things, to enjoin AT&T from selling the EasyLink promissory note held by
AT&T to PTEK and to compel AT&T to participate in EasyLink's current debt
restructuring. See Part II, Item 1, Legal Proceedings. EasyLink believes that if
the sale of the note to PTEK is permitted to occur and AT&T is not compelled to
participate in EasyLink's debt restructuring, EasyLink may be unable to meet
some or all of the payments on this debt or its available cash will be
significantly constrained. Easylink has a variety of commercial relationships
with AT&T, and this dispute may have an adverse effect on these relationships.
If we are unable to complete the elimination of our remaining debt on favorable
terms, we cannot assure you that we will be able to pay interest and other
amounts due on our outstanding indebtedness, or our other obligations, on the
scheduled dates or at all. If our cash flow and cash balances are inadequate to
meet our obligations, we could face substantial liquidity problems. If we are
unable to generate sufficient cash flow or otherwise obtain funds necessary to
make required payments, or if we otherwise fail to comply with any covenants in
our indebtedness, we would be in default under these obligations, which would
permit these lenders to accelerate the maturity of the obligations and could
cause defaults under our indebtedness. Any such default could have a material
adverse effect on our business, results of operations and financial condition.
We cannot assure you that we would be able to repay amounts due on our
indebtedness if payment of the indebtedness were accelerated following the
occurrence of an event of default under, or certain other events specified in,
the agreements governing our outstanding indebtedness and capital leases,
including any deemed sale of all or substantially all of our assets.
The elimination of outstanding debt pursuant to our debt restructuring strategy
will result in substantial cancellation of debt income for income tax purposes.
We intend to minimize income tax payable as a result of the restructuring by,
among other things, offsetting the income with our historical net operating
losses and otherwise reducing the income in accordance with applicable income
tax rules. As result, we do not expect to incur any material current income tax
liability as a result of the elimination of this debt. However, the relevant tax
authorities may challenge our income tax positions, including the use of our
historical net operating losses to offset some or all of the cancellation of
debt income and the application of the income tax rules reducing the
cancellation of debt income. No assurance can be given that we will be able to
offset or otherwise reduce all or any of the cancellation of debt income
resulting from the elimination of debt pursuant to our debt restructuring. If
we are not able to offset or otherwise reduce the cancellation of debt income,
we may incur material income tax liabilities as a result of the elimination of
debt and we may, be unable to pay these liabilities.
We may incur substantial additional indebtedness in the future. The level of our
indebtedness, among other things, could (1) make it difficult for us to make
payments on our indebtedness, (2) make it difficult to obtain any necessary
financing in the future for working capital, capital expenditures, debt service
requirements or other purposes, (3) limit our flexibility in planning for, or
reacting to changes in, our business, and (4) make us more vulnerable in the
event of a downturn in our business.
We 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.
18
We have completed a number of acquisitions and strategic investments since our
initial public offering. For example, we acquired NetMoves Corporation, a
provider of production messaging services and integrated desktop messaging
services to businesses, and The Allegro Group, Inc., a provider of email and
email related services, such as virus blocking and content screening, to
businesses. We also acquired Swift Telecommunications, Inc. and the EasyLink
Services business that it had contemporaneously acquired from AT&T Corp. We will
continue our efforts to acquire or make strategic investments in businesses and
to acquire or license technology and other assets, and any of these acquisitions
may be material to us. We cannot assure you that acquisition or licensing
opportunities will continue to be available on terms acceptable to us or at all.
Such acquisitions involve risks, including:
- - inability to raise the required capital;
- - difficulty in assimilating the acquired operations and personnel;
- - inability to retain any acquired member or customer accounts;
- - disruption of our ongoing business;
- - the need for additional capital to fund losses of acquired
businesses;
- - inability to successfully incorporate acquired technology into our
service offerings and maintain uniform standards, controls,
procedures and policies; and
- - lack of the necessary experience to enter new markets.
We may not successfully overcome problems encountered in connection with
potential acquisitions. In addition, an acquisition could materially impair our
operating results by diluting our stockholders' equity, causing us to incur
additional debt or requiring us to amortize acquisition expenses and acquired
assets or to incur impairment charges as a result of the write-off of goodwill
booked as a result of such acquisition.
We may be unable to successfully complete the migration of the network relating
to our business acquired from AT&T off of AT&T premises.
19
On February 23, 2001, we completed the acquisition of Swift Telecommunications,
Inc. which had contemporaneously acquired the EasyLink Services business of AT&T
Corp. The EasyLink Services business acquired from AT&T provides a variety of
transaction delivery services. This business was a division of AT&T and was not
a separate independent operating entity. We hired only a portion of the
employees of the business.
Under a Transition Services Agreement entered into in connection with the
acquisition, AT&T agreed to provide us with a variety of services to enable us
to continue to operate the business pending the transition to EasyLink. We have
successfully transitioned virtually all of these services provided by AT&T under
the Transition Services Agreement to ourselves, including customer service,
network operations center, telex switching equipment and services and office
space in a variety of locations. However, the network for the portion of this
business relating to EDI, fax and email services continues to reside on AT&T's
premises, but is being operated and maintained by EasyLink. We plan to migrate
our network off of AT&T's premises to EasyLink's premises over the next two
years.
We cannot assure you that we will be able to successfully migrate the remaining
EasyLink Services network from AT&T's premises to our own premises, or
successfully integrate them into our operations, in a timely manner or without
incurring substantial unforeseen expense or without service interruption to our
customers. Even if successfully migrated, we may be unable to operate the
business at expense levels that are ultimately profitable for us. We cannot
assure you that we will be able to retain all of the customers of the EasyLink
Services business. Our inability to successfully migrate, integrate or operate
the network and operations, or to retain customers, of the EasyLink Services
business will result in a material adverse effect on our business, results of
operations and financial condition.
Outsourcing of transaction delivery and transaction management services may not
prove to be viable businesses.
An important part of our business strategy is to leverage our existing global
customer base and global network by continuing to provide our existing
transaction delivery services and by offering these customers additional
transaction delivery and new transaction management services in the future. The
market for transaction management services is only beginning to develop. Our
success will depend on the continued expansion of the market for outsourced
transaction delivery services such as EDI, production messaging services and
integrated desktop messaging services and the development of viable markets for
the outsourcing of additional transaction delivery services and new transaction
management services. Each of these developments is somewhat speculative.
There are significant obstacles to the full development of a sizable market for
the outsourcing of transaction delivery and transaction management services.
Outsourcing is one of the principal methods by which we will attempt to reach
the size we believe is necessary to be successful. Security and the reliability
of the Internet, however, are likely to be of concern to enterprises and service
providers deciding whether to outsource their transaction delivery and
transaction management or to continue to provide it themselves. These concerns
are likely to be particularly strong at larger businesses and service providers,
which are better able to afford the costs of maintaining their own systems.
While we intend to focus exclusively on our outsourced transaction delivery and
transaction management services, we cannot be sure that we will be able to
maintain or expand our business customer base. In addition, the sales cycle for
many of these services is lengthy and could delay our ability to generate
revenues in this market.
Our strategy of developing and offering to existing customers additional
transaction delivery and transaction management services may be unsuccessful.
As part of our business strategy, we plan to develop and offer to existing
customers additional transaction delivery and transaction management services
that will automate more of our customers business processes. We cannot assure
you that we will be able to successfully develop these additional services in a
timely manner or at all or, if developed, that our customers will purchase these
services or will purchase them at prices that we wish to charge. Standards for
pricing in the market for new transaction delivery and transaction management
services are not yet well defined and some businesses and service providers may
not be willing to pay the fees we wish to charge. We cannot assure you that the
fees we intend to charge will be sufficient to offset the related costs of
providing these services.
20
We may fail to meet market expectations because of fluctuations in our quarterly
operating results, which would cause our stock price to decline.
We may experience significant fluctuations in our quarterly results. It is
likely that our operating results in some quarters will be below market
expectations. In this event, the price of our Class A common stock is likely to
decline.
The following are among the factors that could cause significant fluctuations in
our operating results:
- - incurrence of other cash and non-cash accounting charges, including
charges resulting from acquisitions or dispositions of assets,
including from the disposition of our remaining non-core assets, and
write-downs of impaired assets;
- - increases or decreases in the number of transactions generated by our
customers (such as insurance claims, trade and travel confirmations,
purchase orders, invoices, shipping notices, funds transfers, among
others), which is affected by factors that affect specific customers,
the respective industries in which our customers conduct business and
the economy generally;
- - non-cash charges associated with repriced stock options, if our stock
price rises above $16.90;
- - system outages, delays in obtaining new equipment or problems with
planned upgrades;
- - disruption or impairment of the Internet;
- - demand for outsourced transaction delivery and transaction management
services;
- - attracting and retaining customers and maintaining customer
satisfaction;
- - introduction of new or enhanced services by us or our competitors;
- - changes in our pricing policy or that of our competitors;
- - changes in governmental regulation of the Internet and transaction
delivery and transaction management services in particular; and
- - general economic and market conditions and global political factors.
Other such factors in our non-core assets include:
- - incurrence of additional expenditures without receipt of offsetting
revenues pending the sale of these assets.
We may incur significant stock based compensation charges related to repriced
options if our stock price rises above $16.90.
21
In light of the decline in our stock price and in an effort to retain our
employee base, on November 14, 2000, the Company offered to certain of its
employees, officers and directors, other than Gerald Gorman, the right to
reprice certain outstanding stock options to an exercise price equal to $16.90
per share, the closing price of the Company's Class A common stock on Nasdaq on
November 14, 2000 as adjusted for our reverse stock split effected on January
23, 2002. Options to purchase 632,799 shares were repriced. The repriced options
vest at the same rate that they would have vested under their original terms. In
March 2000, Financial Accounting Standards Board ("FASB") issued FASB
Interpretation No. 44, "Accounting for Certain Transactions Involving Stock
Compensation, an interpretation of APB Opinion No. 25" ("Interpretation"). Among
other issues, this Interpretation clarifies (a) the definition of employee for
purposes of applying Opinion 25, (b) the criteria for determining whether a plan
qualifies as a noncompensatory plan, (c) the accounting consequence of various
modifications to the terms of a previously fixed stock option or award, and (d)
the accounting for an exchange of stock compensation awards in a business
combination. As a result, under the Interpretation, stock options repriced after
December 15, 1998 are subject to variable plan accounting treatment. This
guidance requires the Company to remeasure compensation cost for outstanding
repriced options each reporting period based on changes in the market value of
the underlying common stock. If our stock price rises above the $16.90 exercise
price of the repriced options, this accounting treatment may result in
significant non-cash compensation charges in future periods.
Several of our competitors have substantially greater resources, longer
operating histories, larger customer bases and broader product offerings.
Our business is, and we believe will continue to be, intensely competitive. See
"Part I Item 1 - Business - Competition" in our Form 10-K filed March 31, 2003
and subsequent reports filed with the Securities and Exchange Commission.
Many of our competitors have greater market presence, engineering and marketing
capabilities, and financial, technological and personnel resources than those
available to us. As a result, they may be able to develop and expand their
communications and network infrastructures more quickly, adapt more swiftly to
new or emerging technologies and changes in customer requirements, take
advantage of acquisition and other opportunities more readily, and devote
greater resources to the marketing and sale of their products and services. In
addition, current and potential competitors have established or may establish
cooperative relationships among themselves or with third parties to increase the
ability of their services to address the needs of our current and prospective
customers. Accordingly, it is possible that new competitors or alliances among
competitors may emerge and rapidly acquire significant market share. In addition
to direct competitors, many of our larger potential customers may seek to
internally fulfill their messaging needs through the deployment of their own on
premises messaging systems.
Some of our competitors provide a variety of telecommunications services and
other business services, as well as software and hardware solutions, in addition
to transaction delivery or transaction management services. The ability of these
competitors to offer a broader suite of complementary services and software or
hardware may give them a considerable advantage over us.
The level of competition is likely to increase as current competitors increase
the sophistication of their offerings and as new participants enter the market.
In the future, as we expand our service offerings, we expect to encounter
increased competition in the development and delivery of these services. We may
not be able to compete successfully against our current or future competitors.
We have aggressively expanded our operations in anticipation of continued growth
in our business and as a result of our acquisitions. We have also developed the
technology and infrastructure to offer a range of services in our target market.
This expansion has placed, and we expect it to continue to place, a significant
strain on our managerial, operational and financial resources. If we cannot
manage our growth effectively, our business, operating results and financial
condition will suffer.
It is difficult to retain key personnel and attract additional qualified
employees in our business and the loss of key personnel and the burden of
attracting additional qualified employees may impede the operation and growth of
our business and cause our revenues to decline.
22
Our future success depends to a significant extent on the continued service of
our key technical, sales and senior management personnel, but they have no
contractual obligation to remain with us. In particular, our success depends on
the continued service of Gerald Gorman, our Chairman, Thomas Murawski, our
President and Chief Executive Officer, George Abi Zeid, our
President-International Operations, and Debra McClister, our Executive Vice
President and Chief Financial Officer. The loss of the services of Messrs.
Gorman, Murawski or Abi Zeid or of Ms. McClister, or several other key
employees, would impede the operation and growth of our business.
To manage our existing business and handle any future growth, we will have to
attract, retain and motivate additional highly skilled employees. In particular,
we will need to hire and retain qualified sales people if we are to meet our
sales goals. We will also need to hire and retain additional experienced and
skilled technical personnel in order to meet the increasing technical demands of
our expanding business. Competition for employees in messaging-related
businesses is intense. We have in the past experienced, and expect to continue
to experience, difficulty in hiring and retaining employees with appropriate
qualifications. If we are unable to do so, our management may not be able to
effectively manage our business, exploit opportunities and respond to
competitive challenges.
Our business is heavily dependent on technology, including technology that has
not yet been proven reliable at high traffic levels and technology that we do
not control.
The performance of our computer systems is critical to the quality of service we
are able to provide to our customers. If our services are unavailable or fail to
perform to their satisfaction, they may cease using our service. In addition,
our agreements with several of our customers establish minimum performance
standards. If we fail to meet these standards, our customers could terminate
their relationships with us and assert claims for monetary damages.
We may need to upgrade our computer systems to accommodate increases in traffic
and to accommodate increases in the usage of our services, but we may not be
able to do so while maintaining our current level of service, or at all.
We must continue to expand and adapt our computer systems as the number of
customers and the amount of information they wish to transmit increases and as
their requirements change, and as we further develop our services. Because we
have only been providing some of our services for a limited time, and because
our computer systems for these services have not been tested at greater
capacities, we cannot guarantee the ability of our computer systems to connect
and manage a substantially larger number of customers or meet the needs of
business customers at high transmission speeds. If we cannot provide the
necessary service while maintaining expected performance, our business would
suffer and our ability to generate revenues through our services would be
impaired.
The expansion and adaptation of our computer systems will require substantial
financial, operational and managerial resources. We may not be able to
accurately project the timing of increases in traffic or other customer
requirements. In addition, the very process of upgrading our computer systems
could cause service disruptions. For example, we may need to take various
elements of the network out of service in order to install some upgrades.
Our computer systems may fail and interrupt our service.
Our customers have in the past experienced interruptions in our services. We
believe that these interruptions will continue to occur from time to time. These
interruptions are due to hardware failures, failures in telecommunications and
other services provided to us by third parties and other computer system
failures. These failures have resulted and may continue to result in significant
disruptions to our service. Some of our operations have redundant switch-over
capability. Although we plan to install backup computers and implement
procedures on other parts of our operations to reduce the impact of future
malfunctions in these systems, the presence of single points of failure in our
network increases the risk of service interruptions. In addition, substantially
all of our computer and communications systems relating to our services are
currently located in Manhattan, Jersey City, New Jersey, Piscataway, New Jersey,
Washington, DC, Bridgeton, Missouri and Dayton, Ohio. We currently do not have
alternate sites from which we could conduct these operations in the event of a
disaster. Our computer and communications hardware is vulnerable to damage or
interruption from fire, flood, earthquake, power loss, telecommunications
failure and similar events. Our services would be suspended for a significant
period of time if any of our primary data centers was severely damaged or
destroyed. We might also lose customer transaction documents and other customer
files, causing significant customer dissatisfaction and possibly giving rise to
claims for monetary damages. As a result of the recent relocation of our
corporate headquarters during the first quarter of 2003, we plan to consolidate
over time an increasing portion of our computer systems and networks at the new
location. This consolidation may result in interruptions in our services to some
of our customers.
23
Our services will become less desirable or obsolete if we are unable to keep up
with the rapid changes characteristic of our business.
Our success will depend on our ability to enhance our existing services and to
introduce new services in order to adapt to rapidly changing technologies,
industry standards and customer demands. To compete successfully, we will have
to accurately anticipate changes in business demand and add new features to our
services very rapidly. We may not be able to integrate the necessary technology
into our computer systems on a timely basis or without degrading the performance
of our existing services. We cannot be sure that, once integrated, new
technology will function as expected. Delays in introducing effective new
services could cause existing and potential customers to forego use of our
services and to use instead those of our competitors.
Our business will suffer if we are unable to provide adequate security for our
service, or if our service is impaired by security measures imposed by third
parties.
Security is a critical issue for any outsourced transaction delivery or
transaction management service, and presents a number of challenges for us.
If we are unable to maintain the security of our service, our reputation and our
ability to attract and retain customers may suffer, and we may be exposed to
liability. Third parties may attempt to breach our security or that of our
customers whose networks we may maintain or for whom we provide services. If
they are successful, they could obtain information that is sensitive or
confidential to a customer or otherwise disrupt a customer's operations or
obtain confidential information, including our customer's profiles, passwords,
financial account information, credit card numbers, stored email or other
personal or business information. Our customers or their employees may assert
claims for money damages for any breach in our security and any breach could
harm our reputation.
Our computers are vulnerable to computer viruses, physical or electronic
break-ins and similar incursions, which could lead to interruptions, delays or
loss of data. We expect to expend significant capital and other resources to
license or create encryption and other technologies to protect against security
breaches or to alleviate problems caused by any breach. Nevertheless, these
measures may prove ineffective. Our failure to prevent security breaches may
expose us to liability and may adversely affect our ability to attract and
retain customers and develop our business market. Security measures taken by
others may interfere with the efficient operation of our service, which may harm
our reputation, adversely impact our ability to attract and retain customers.
"Firewalls" and similar network security software employed by third parties can
interfere with the operation of our services.
Our customers are subject to, and in turn require that their service providers
meet, increasingly strict guidelines for network and operational security. If we
are unable to meet the security requirements of a customer, we may be unable to
obtain or keep their business.
We are dependent on licensed technology.
We license a significant amount of technology from third parties, including
technology related to our virus protection, spam control and content filtering
services, Internet fax services, billing processes and database. We anticipate
that we will need to license additional technology to remain competitive. We may
not be able to license these technologies on commercially reasonable terms or at
all. Third-party licenses expose us to increased risks, including risks relating
to the integration of new technology, the diversion of resources from the
development of our own proprietary technology, a greater need to generate
revenues sufficient to offset associated license costs, and the possible
termination of or failure to renew an important license by the third-party
licensor.
24
If the Internet and other third-party networks on which we depend to deliver our
services become ineffective as a means of transmitting data, the benefits of our
service may be severely undermined.
Our business depends on the effectiveness of the Internet as a means of
transmitting data. The recent growth in the use of the Internet has caused
frequent interruptions and delays in accessing and transmitting data over the
Internet. Any deterioration in the performance of the Internet as a whole could
undermine the benefits of our services. Therefore, our success depends on
improvements being made to the entire Internet infrastructure to alleviate
overloading and congestion. We also depend on telecommunications network
suppliers such as AT&T Corp. and Worldcom for a variety of telecommunications
and Internet services. The network for the EasyLink Services business acquired
from AT&T continues to reside on AT&T's premises. See "Risk Factors - We May Be
Unable to Successfully Integrate the EasyLink Services Business Acquired From
AT&T" above, "Item 1. Business - Technology" in our Form 10-K filed March 31,
2003 and subsequent filings with the Securities and Exchange Commission.
Gerald Gorman and George Abi Zeid collectively beneficially owned as of May 1,
2003 approximately 27.69% of the total outstanding voting power of EasyLink and
will be able to exert significant influence over any vote of stockholders.
After giving effect to the issuance of additional shares pursuant to our recent
debt elimination, Gerald Gorman, our Chairman, beneficially owned as of May 1,
2003 Class A and Class B common stock representing approximately 19.75% of the
voting power of our outstanding common stock. Each share of Class B common stock
entitles the holder to 10 votes on any matter submitted to the stockholders.
George Abi Zeid, our President-International Operations and Director,
beneficially owned as of February 28, 2003 Class A common stock representing
approximately 7.94% of the voting power of our outstanding common stock. Based
on their voting power as of May 1, 2003, Mr. Gorman and Mr. Abi Zeid will likely
be able to exert significant influence over the outcome of all matters requiring
stockholder approval, including the election of directors, amendment of our
charter and approval of significant corporate transactions. Mr. Gorman and Mr.
Abi Zeid may be in a position to prevent a change in control of EasyLink even if
other stockholders holding a majority of the voting power of the shares not held
by Mr. Gorman and Mr. Abi Zeid were in favor of the transaction.
We have agreed to permit Federal Partners, L.P., a holder of our senior
convertible notes and Class A common stock, to designate one member of our board
of directors. In addition, in connection with the acquisition of Swift
Telecommunications, Inc., we agreed to appoint George Abi Zeid, the former sole
shareholder of Swift, as a director and as our President of International
Operations.
Our charter contains provisions that could deter or make more expensive a
takeover of EasyLink. These provisions include the ability to issue "blank
check" preferred stock without stockholder approval.
Our goal of building brand identity is likely to be difficult and expensive.
We announced on April 2, 2001 that we have changed our corporate name to
EasyLink Services Corporation to more accurately reflect the strengths,
relationships and solutions that we offer. We believe that a quality brand
identity will be essential if we are to develop our business services market. If
our marketing efforts cost more than anticipated or if we cannot increase our
brand awareness, our losses will increase and our ability to succeed will be
seriously impeded.
Our expansion into international markets is subject to significant risks and our
losses may increase and our operating results may suffer if our revenues from
international operations do not exceed the costs of those operations.
We intend to continue to expand into international markets and to expend
significant financial and managerial resources to do so. We may not be able to
compete effectively in international markets. If our revenues from international
operations do not exceed the expense of establishing and maintaining these
operations, our losses will increase and our operating results will suffer. We
face significant risks inherent in conducting business internationally, such as:
25
- - uncertain demand in foreign markets for transaction delivery and
transaction management services;
- - difficulties and costs of staffing and managing international
operations;
- - differing technology standards;
- - difficulties in collecting accounts receivable and longer collection
periods;
- - economic instability and fluctuations in currency exchange rates and
imposition of currency exchange controls;
- - potentially adverse tax consequences;
- - regulatory limitations on the activities in which we can engage and
foreign ownership limitations on our ability to hold an interest in
entities through which we wish to conduct business;
- - political instability, unexpected changes in regulatory requirements,
and reduced protection for intellectual property rights in some
countries;
- - export restrictions, and
- - difficulties in enforcing contracts and potentially adverse
consequences.
Regulation of transaction delivery and transaction management services and
Internet use is evolving and may adversely impact our business.
There are currently few laws or regulations that specifically regulate activity
on the Internet. However, laws and regulations may be adopted in the future that
address issues such as user privacy, pricing, and the characteristics and
quality of products and services. For example, the Telecommunications Act of
1996 restricts the types of information and content transmitted over the
Internet. Several telecommunications companies have petitioned the FCC to
regulate ISPs and online service providers in a manner similar to long distance
telephone carriers and to impose access fees on these companies. This could
increase the cost of transmitting data over the Internet. Any new laws or
regulations relating to the Internet could adversely affect our business.
Moreover, the extent to which existing laws relating to issues such as property
ownership, pornography, libel and personal privacy are applicable to the
Internet is uncertain. We could face liability for defamation, copyright, patent
or trademark infringement and other claims based on the content of messages
transmitted over our system. We may also face liability for unsolicited
commercial and other email and fax messages sent by users of our services. We do
not and cannot screen all the content generated and received by users of our
services. Some foreign governments, such as Germany, have enforced laws and
regulations related to content distributed over the Internet that are more
strict than those currently in place in the United States.
A majority of our services are currently classified by the FCC as "information
services," and therefore are exempt from public utility regulation. To the
extent that we are permitted to offer all of our services as a single "bundle of
interrelated products," then the whole bundle is currently exempt from
regulation as a "hybrid service." If considered independent of the bundle,
however, our fax-to-fax services, when conducted over circuit-switched network
lines, and our telex services, qualify as "telecommunications services," and
would thus be subject to federal regulation. Moreover, while the FCC has until
now exercised forbearance in regulating IP communications, it has indicated that
it might regulate certain IP communications as "telecommunications services" in
the future. There can be no assurance that the FCC will not change its
regulatory classification system and thereby subject us to unexpected and
burdensome additional regulation. In addition, a variety of states regulate
certain of our services when provided on an intrastate basis.
26
We obtained authorizations from the FCC to provide such telecommunications
services in conjunction with our acquisition of these telecommunications
services from NetMoves, and are classified as a "non-dominant interexchange
carrier." While the FCC has generally chosen not to exercise its statutory power
to closely regulate the charges or practices of non-dominant carriers, it will
act upon complaints against such carriers for failure to comply with statutory
obligations or with the FCC's rules, regulations and policies - to the extent
that such services are, in the FCC's view, subject to regulation.
Continued changes in telecommunications regulations may significantly reduce the
cost of domestic and international calls. To the extent that the cost of
domestic and international calls decreases, we will face increased competition
for our fax services which may have a material adverse effect on our business,
financial condition or results in operations.
In connection with the deployment of Internet-capable nodes in countries
throughout the world, we are required to satisfy a variety of foreign regulatory
requirements. We intend to explore and seek to comply with these requirements on
a country-by-country basis as the deployment of Internet-capable fax nodes
continues. There can be no assurance that we will be able to satisfy the
regulatory requirements in each of the countries currently targeted for node
deployment, and the failure to satisfy such requirements may prevent us from
installing Internet-capable fax nodes in such countries. The failure to deploy a
number of such nodes could have a material adverse effect on our business,
operating results and financial condition.
Our fax nodes and our faxLauncher service utilize encryption technology in
connection with the routing of customer documents through the Internet. The
export of such encryption technology is regulated by the United States
government. We have authority for the export of such encryption technology other
than to Cuba, Iran, Iraq, Libya, North Korea, and Rwanda. Nevertheless, there
can be no assurance that such authority will not be revoked or modified at any
time for any particular jurisdiction or in general. In addition, there can be no
assurance that such export controls, either in their current form or as may be
subsequently enacted, will not limit our ability to distribute our services
outside of the United States or electronically. While we take precautions
against unlawful exportation of our software, the global nature of the Internet
makes it virtually impossible to effectively control the distribution of our
services. Moreover, future Federal or state legislation or regulation may
further limit levels of encryption or authentication technology. Any such export
restrictions, the unlawful exportation of our services, or new legislation or
regulation could have a material adverse effect on our business, financial
condition and results of operations.
The legal structure and scope of operations of our subsidiaries in some foreign
countries may be subject to restrictions which could result in severe limits to
our ability to conduct business in these countries. To the extent that we
develop or offer messaging services in foreign countries, we will be subject to
the laws and regulations of these countries. The laws and regulations relating
to the Internet in many countries are evolving and in many cases are unclear as
to their application. For example, in India, the PRC and other countries we may
be subject to licensing requirements with respect to the activities in which we
propose to engage and we may also be subject to foreign ownership limitations or
other approval requirements that preclude our ownership interests or limit our
ownership interests to up to 49% of the entities through which we propose to
conduct any regulated activities. If these limitations apply to our activities,
including our activities conducted through our subsidiaries, our opportunities
to generate revenue will be reduced, our ability to compete successfully in
these markets will be adversely affected, our ability to raise capital in the
private and public markets may be adversely affected and the value of our
investments and acquisitions in these markets may decline. Moreover, to the
extent we are limited in our ability to engage in certain activities or are
required to contract for these services from a licensed or authorized third
party, our costs of providing our services will increase and our ability to
generate profits may be adversely affected.
Our intellectual property rights are critical to our success, but may be
difficult to protect.
27
We regard our copyrights, service marks, trademarks, trade secrets, domain names
and similar intellectual property as critical to our success. We rely on
trademark and copyright law, trade secret protection and confidentiality and/or
license agreements with our employees, customers, strategic partners and others
to protect our proprietary rights. Despite our precautions, unauthorized third
parties may improperly obtain and use information that we regard as proprietary.
Third parties may submit false registration data attempting to transfer key
domain names to their control. Our failure to pay annual registration fees for
domain names may result in the loss of these domains to third parties. Third
parties have challenged our rights to use some of our domain names, and we
expect that they will continue to do so, which may affect the value that we can
derive from the planned disposition of the domain names included among our
non-core assets.
The status of United States patent protection for software products is not well
defined and will evolve as additional patents are granted. If we apply for a
patent in the future, we do not know if our application will be issued with the
scope of the claims we seek, if at all. The laws of some foreign countries do
not protect proprietary rights to the same extent as do the laws of the United
States. Our means of protecting our proprietary rights in the United States or
abroad may not be adequate and competitors may independently develop similar
technology.
Third parties may infringe or misappropriate our copyrights, trademarks and
similar proprietary rights. In addition, other parties have asserted and may in
the future assert infringement claims against us. We cannot be certain that our
services do not infringe issued patents. Because patent applications in the
United States are not publicly disclosed until the patent is issued,
applications may have been filed which relate to our services.
We have been and may continue to be subject to legal proceedings and claims from
time to time in the ordinary course of our business, including claims related to
the use of our domain names and claims of alleged infringement of the trademarks
and other intellectual property rights of third parties. Third parties have
challenged our rights to register and use some of our domain names based on
trademark principles and on the Anticybersquatting Consumer Protection Act. If
domain names become more valuable to businesses and other persons, we expect
that third parties will continue to challenge some of our domain names and that
the number of these challenges may increase. In addition, the existing or future
laws of some countries, in particular countries in Europe, may limit or prohibit
the use in those countries or elsewhere of some of our geographic names that
contain the names of a city in those countries or the name of those countries.
Intellectual property litigation is expensive and time-consuming and could
divert management's attention away from running our business. These claims and
the potential for such claims may reduce the value that we can expect to receive
from the disposition of our domain names.
In connection with the sale of our consumer-based email and advertising network
business, we transferred to the buyer the rights to direct the "MX" record, or
the right to direct email messages addressed to domain names owned by us and
used in this business. Although we do not operate the service or have any role
in the delivery of messages sent by users of the service, our position as the
registrant of the domain names used as addresses for email accounts maintained
by such service may subject us to claims from time to time. We could face
liability for defamation, copyright, patent or trademark infringement,
harassment, unsolicited commercial e-mail and other claims based on the content
of the messages transmitted over the service of this business. These claims,
even if without merit, can cause us to incur legal expenses and may divert
management time and resources.
A substantial amount of our common stock may come onto the market in the future,
which could depress our stock price.
Sales of a substantial number of shares of our common stock in the public market
could cause the market price of our Class A common stock to decline. As of May
1, 2003, we had an aggregate of 42,938,720 shares of Class A and Class B common
stock outstanding. As of May 1, 2003 we had options to purchase approximately
2.7 million shares of Class A common stock outstanding. As of May 1, 2003, we
had warrants to purchase 1,843,942 shares of Class A common stock outstanding.
As of May 1, 2003, we had approximately 811,927 shares of Class A common stock
issuable upon conversion of outstanding convertible notes and an indeterminate
number of additional shares of Class A common stock issuable over five years in
payment of interest on $861,886 in principal amount of such notes.
28
As of May 1, 2003, over 36 million shares of Class A common stock and Class B
common stock were freely tradable, in some cases subject to the volume and
manner of sale limitations contained in Rule 144. Approximately 4.9 million
shares will become freely tradable after October 31, 2003 and approximately 1.1
million shares of Class A common stock will become available for sale at various
dates upon the expiration of one-year holding periods or upon the expiration of
any other applicable restrictions on resale. We may issue large amounts of
additional Class A common stock, which may also be sold and which could
adversely affect the price of our stock. Approximately 22.3 million of our
outstanding shares were issued in connection with the elimination of debt on May
1, 2003. If the holders of these shares sell large numbers of shares, these
holders could cause the price of our Class A common stock to fall.
As of May 1, 2003, the holders of approximately 8.2 million shares of
outstanding Class A common stock, the holders of 1.8 million shares of Class A
common stock issuable upon exercise of our outstanding warrants and the holders
of approximately 86,189 shares of Class A common stock issuable upon conversion
of our outstanding senior convertible notes had the right, subject to various
conditions, to require us to file registration statements covering their shares,
or to include their shares in registration statements that we may file for
ourselves or for other stockholders. By exercising their registration rights and
selling a large number of shares, these holders could cause the price of the
Class A common stock to fall. An undetermined number of these shares have been
sold publicly pursuant to Rule 144.
Our Class A common stock may be subject to delisting from the Nasdaq National
Market.
Our Class A common stock faces potential delisting from the Nasdaq National
Market which could hurt the liquidity of our Class A common stock. We may be
unable to comply with the standards for continued listing on the Nasdaq National
Market. These standards require, among other things, that our Class A common
stock have a minimum bid price of $1. Specifically, an issuer will be considered
non-compliant with the minimum bid price requirement only if it fails to satisfy
the applicable requirement for any 30 consecutive trading day period. It would
then be afforded a 90 calendar day grace period in which to regain compliance.
In addition, the listing standards require that we maintain compliance with
various other standards, including market capitalization or total assets and
total revenue, number of publicly held shares, which are shares held by persons
who are not officers, directors or beneficial owners of 10% of our outstanding
shares, and market value of publicly held shares. Alternatively, we can comply
with certain other standards, including a $10 million minimum stockholders'
equity requirement. The minimum bid price of our stock was below $1 during
various periods in the fourth quarter of 2000 and the first quarter of 2001 and
was below $1 during the period from March 14, 2001 through January 22, 2002.
On January 23, 2002, we effected a ten-for-one reverse stock split. Although our
stock price exceeded the $1 minimum bid price requirement for a period of time
since our reverse stock split, our stock price was also below $1.00 during the
period from July 10, 2002 through July 26, 2002 and from July 30, 2002 through
August 16, 2002 and from November 18, 2002 until the present. On December 24,
2002 Nasdaq granted us 90 calendar days, or until March 24, 2003, to regain
compliance. On March 11, 2003, the SEC declared effective Nasdaq's rule filing
which extends the 90 day period to 180 days. Accordingly, the Company now has
until June 23, 2003 to regain compliance. In order to regain compliance, the bid
price for the Company's Class A common stock must close at or above $1 per share
for 10 consecutive trading days. If we are unable to regain compliance, we may
be subject to delisting.
We had a total stockholders' deficit in the amount of $61.8 million as of
December 31, 2002 and $57.4 million as of March 31, 2003. As a result, we are
currently not in compliance with the $10 million minimum total stockholders'
equity requirement. An alternative listing standard to the minimum total
stockholders equity standard requires that we maintain a minimum market value of
our publicly held shares of not less than $15 million.
29
We are also required to maintain at least 3 independent directors on our board
to satisfy the Nasdaq's audit committee requirements.
Due to the failure to maintain the required minimum of three independent
directors on its board and audit committee and its failure to maintain
compliance with the $10 million minimum total stockholders equity requirement,
the Staff of Nasdaq made an initial delisting determination. EasyLink appealed
to Nasdaq's Listing Qualifications Panel and a hearing was scheduled for May 15,
2003 to consider EasyLink's request for continued listing on the Nasdaq National
Market. On May 14, 2003, Nasdaq's Hearings Department determined to postpone the
May 15, 2003 hearing. The postponement was granted based on the determination by
the Nasdaq staff that EasyLink is currently in compliance with Nasdaq's listing
requirements except for the $1 minimum bid price requirement. EasyLink has until
June 23, 2003 to regain compliance with this requirement. If EasyLink fails to
regain compliance with the minimum bid price requirement or fails to maintain
compliance with the other listing requirements, the hearing to consider
EasyLink's continued listing will be reinstated within 25-45 days after June 23,
2003 or the date of Nasdaq's determination that EasyLink has failed to comply
with any other compliance requirement.
The Nasdaq staff determined that EasyLink had regained compliance with Nasdaq's
independent director requirements as a result of EasyLink's recent appointment
of three additional independent directors to its board of directors and two
additional independent directors to its audit committee. The Nasdaq staff also
determined that EasyLink was in compliance with the $15 million minimum market
value of publicly held shares requirement, an alternative listing standard to
minimum stockholders equity, based on the current number of publicly held shares
resulting primarily from EasyLink's recent debt reduction and financing. As
determined by Nasdaq, the number of publicly held shares, which excludes shares
held by directors, officers and 10% shareholders, is approximately 31.2 million
shares as of May 1, 2003.
There can be no assurance that EasyLink will regain compliance with the minimum
bid price requirement by June 23, 2003 or that it will maintain compliance with
the other listing standards, including the $15 million minimum market value of
publicly held shares requirement. If the hearing to consider EasyLink's
continued listing is reinstated, there can be no assurance the Listing
Qualifications Panel will grant the Company's request for continued listing.
If our common stock were to be delisted from trading on the Nasdaq National
Market and were neither re-listed thereon nor listed for trading on the Nasdaq
Small Cap Market or other recognized securities exchange, trading, if any, in
the Class A common stock may continue to be conducted on the OTC Bulletin Board
or in the non-Nasdaq over-the-counter market. Delisting would result in limited
release of the market price of the Class A common stock and limited news
coverage of EasyLink and could restrict investors' interest in our Class A
common stock and materially adversely affect the trading market and prices for
our Class A common stock and our ability to issue additional securities or to
secure additional financing.
Our stock price has been volatile and we expect that it will continue to be
volatile.
Our stock price has been volatile since our initial public offering and we
expect that it will continue to be volatile. As discussed above, our financial
results are difficult to predict and could fluctuate significantly. In addition,
the market prices of securities of electronic services companies have been
highly volatile. A stock's price is often influenced by rapidly changing
perceptions about the future of electronic services or the results of other
Internet or technology companies, rather than specific developments relating to
the issuer of that particular stock. As a result of volatility in our stock
price, a securities class action may be brought against us. Class-action
litigation could result in substantial costs and divert our management's
attention and resources.
We may have continuing obligations in connection with the sale of our
advertising network business.
30
On March 30, 2001, we completed the sale of our advertising network business to
Net2Phone, Inc. Included in the sale was our rights to provide e-mail-based
advertising and permission marketing solutions to advertisers, as well as our
rights to provide e-mail services directly to consumers at the www.mail.com Web
site and in partnership with other Web sites. Net2Phone has subsequently
transferred this business to a third party.
Notwithstanding the sale of this business and the assignment to Net2Phone of our
Web site contracts with third parties, we may nonetheless remain liable for
obligations under some of such third party Web site contracts. Accordingly, we
may have liability if there is a breach on the part of the third party to which
we have migrated the hosting of consumer e-mail boxes or on the part of
Net2Phone or its assignee under the third party Web site agreements that were
assigned to them.
ITEM 4 CONTROLS AND PROCEDURES
In the 90 days prior to the filing date of this Quarterly Report on Form 10-Q,
our Chief Executive Officer and Chief Financial Officer evaluated the
effectiveness of EasyLink's "disclosure controls and procedures," as that term
is defined in Rule 13a-14(c) promulgated under the Securities and Exchange Act
of 1934, as amended (the "Exchange Act"). Based on that evaluation, the Chief
Executive Officer and Chief Financial Officer concluded that the disclosure
controls and procedures are effective to ensure that information required to be
disclosed by EasyLink in the reports that we file or submit under the Exchange
Act is recorded, processed, summarized and reported, within the time periods
specified in the SEC's rules and forms, and to ensure that such information is
made known to the Chief Executive Officer and Chief Financial Officer as
appropriate to allow timely decisions regarding required disclosure. There have
been no significant changes in EasyLink's internal controls or in other factors
that could significantly affect these controls subsequent to the date the Chief
Executive Officer and Chief Financial Officer completed their evaluation. There
were no significant deficiencies or material weaknesses, and therefore no
corrective action with regard thereto.
31
PART II OTHER INFORMATION
Item 1: Legal Proceedings
As previously announced, in response to the announcement by PTEK Holdings that
it had entered into an agreement to purchase a promissory note in the principal
amount of $10 million and shares of Class A common stock of EasyLink held by
AT&T Corp., EasyLink commenced an action on March 17, 2003 against AT&T Corp.,
PTEK Holdings, Inc. and PTEK's subsidiary Xpedite Systems, Inc. seeking, among
other relief, to enjoin AT&T from selling the EasyLink promissory note held by
AT&T to PTEK and to compel AT&T to participate in EasyLink's debt restructuring.
The Court ordered limited document discovery and established a timetable for
considering EasyLink's motion, including an oral argument hearing on May 1,
2003. The hearing has been rescheduled for May 22, 2003. AT&T Corp. and PTEK
have filed a motion to dismiss EasyLink's complaint or, alternatively, to
transfer the action to the Law Division. No assurance can be given as to the
outcome of this matter.
Item 2: Changes in Securities and Use of Proceeds
Recent Sales of Unregistered Securities
During the three months ended March 31, 2003, we issued shares of Class A common
stock as follows:
The Company issued 210,479 shares of Class A common stock valued at
approximately $119,732 as payment for interest in lieu of cash in
reliance on the private placement exemption contained in Section 4(2)
of the Securities Act.
The Company issued an aggregate of 154,184 shares of Class A common
stock pursuant to its 401(k) plan on January 15, 2003, February 15,
2003 and March 15, 2003.
The Company issued 1,070,183 shares of Class A common stock in exchange
for the cancellation of debt in reliance on the exemption contained in
Section 3(a)(9) of the Securities Act.
Item 6 Exhibits and Reports on Form 8-K
The following exhibits are filed as part of this report:
Exhibit 3(ii) Amended and Restated ByLaws.
Exhibit 10.1 Form of Indemnification Agreement for Directors and Officers.
Exhibit 10.2 Debt Exchange Agreement between George Abi Zeid and the Company.
Exhibit 10.3 Letter Agreement relating to payment of accrued interest between
George Abi Zeid and the Company and the promissory note
referenced therein.
Exhibit 99.1 Certificate of Chief Executive Officer pursuant to section
1350 of chapter 63 of title 18 of the United States Code
Exhibit 99.2 Certificate of Chief Financial Officer pursuant to section
1350 of chapter 63 of title 18 of the United States Code
Reports on Form 8-K - EasyLink Services Corporation filed the following reports
on Form 8-K during the three months ended March 31, 2003:
On January 28, 2003, the Company filed a Form 8K disclosing the status
of its proposed debt restructuring.
32
On March 6, 2003, the Company filed a Form 8-K disclosing the
announcement by PTEK Holdings regarding its agreement to acquire from
AT&T Corp. a promissory note and shares of Class A common stock issued
by EasyLink and the status of certain litigation.
On March 19, 2003, the Company filed a Form 8K disclosing the
commencement of a lawsuit against AT&T Corp., PTEK Holdings and
Xpedite.
33
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 L. MCCLISTER
------------------------------
Executive Vice President and
Chief Financial Officer
May 15, 2003
34
CERTIFICATION
I, Thomas Murawski, certify that:
(1) I have reviewed this quarterly report on Form 10-Q of EasyLink Services
Corporation ("Easylink");
(2) based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary in order
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
quarterly report;
(3) based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of
EasyLink as of, and for, the periods presented in this quarterly report;
(4) EasyLink's other certifying officer and I are responsible for establishing
and maintaining disclosure controls and procedures (as defined in Exchange Act
Rules 13a-14 and 15d-14) for EasyLink and we have:
(a) designed such controls and procedures to ensure that material information
relating to EasyLink, including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during the period in which this
quarterly report is being prepared;
(b) evaluated the effectiveness of EasyLink's controls and procedures as of a
date within 90 days prior to the filing date of this quarterly report (the
"Evaluation Date"); and
(c) presented in this quarterly report our conclusions about the effectiveness
of the controls and procedures based on our evaluation as of the Evaluation
Date;
(5) EasyLink's other certifying officer and I have disclosed, based on our most
recent evaluation, to EasyLink's auditors and the audit committee of EasyLink's
Board of Directors (or persons fulfilling the equivalent function):
(a) all significant deficiencies in the design or operation of internal controls
which could adversely affect EasyLink's ability to record, process, summarize
and report financial data and have identified for EasyLink's auditors any
material weaknesses in internal controls; and
(b) any fraud, whether or not material, that involves management or other
employees who have a significant role in EasyLink's internal controls; and
(6) EasyLink's other certifying officer and I have indicated in this quarterly
report whether or not there were significant changes in internal controls or in
other factors that could significantly affect internal controls subsequent to
the date of our evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Date: May 15, 2003 /s/ THOMAS MURAWSKI
-------------------
Thomas Murawski
Chief Executive Officer and President
35
CERTIFICATION
I, Debra McClister, certify that:
(1) I have reviewed this quarterly report on Form 10-Q of EasyLink Services
Corporation ("Easylink");
(2) based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary in order
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
quarterly report;
(3) based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of
EasyLink as of, and for, the periods presented in this quarterly report;
(4) EasyLink's other certifying officer and I are responsible for establishing
and maintaining disclosure controls and procedures (as defined in Exchange Act
Rules 13a-14 and 15d-14) for EasyLink and we have:
(a) designed such controls and procedures to ensure that material information
relating to EasyLink, including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during the period in which this
quarterly report is being prepared;
(b) evaluated the effectiveness of EasyLink's controls and procedures as of a
date within 90 days prior to the filing date of this quarterly report (the
"Evaluation Date"); and
(c) presented in this quarterly report our conclusions about the effectiveness
of the controls and procedures based on our evaluation as of the Evaluation
Date;
(5) EasyLink's other certifying officer and I have disclosed, based on our most
recent evaluation, to EasyLink's auditors and the audit committee of EasyLink's
Board of Directors (or persons fulfilling the equivalent function):
(a) all significant deficiencies in the design or operation of internal controls
which could adversely affect EasyLink's ability to record, process, summarize
and report financial data and have identified for EasyLink's auditors any
material weaknesses in internal controls; and
(b) any fraud, whether or not material, that involves management or other
employees who have a significant role in EasyLink's internal controls; and
(6) EasyLink's other certifying officer and I have indicated in this quarterly
report whether or not there were significant changes in internal controls or in
other factors that could significantly affect internal controls subsequent to
the date of our evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Date: May 15, 2003 /s/ DEBRA McCLISTER
---------------------------
Debra McClister
Executive Vice President and Chief
Financial Officer
36