UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 2006
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 000-26371
EASYLINK SERVICES CORPORATION
(Exact Name of Registrant as Specified in its Charter)
DELAWARE 13-3787073
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
33 KNIGHTSBRIDGE ROAD, PISCATAWAY, NJ 08854
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICE) (ZIP CODE)
(732) 652-3500
(Registrant's Telephone Number Including Area Code)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
Title of Each Class Name of Exchange on Which Registered
Class A Common Stock, $0.01 par value; The NASDAQ Stock Market LLC
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
Title of Each Class Name of Exchange on Which Registered
None
Indicate by check if the registrant is a well-known seasoned issuer, as defined
in Rule 405 of the Securities Act. [ ] Yes [X] No
Indicate by check if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act. [ ] Yes [X] No
Indicate by check whether the registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES [X] NO [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K [ ]
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer or a non-accelerated filer.
Large accelerated filer [ ] Accelerated filer [ ] Non-accelerated filer [X]
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Act). [ ] Yes [X] No
The aggregate market value of the voting stock held by non-affiliates of the
registrant as of June 30, 2006 was $29,506,000. Solely for purposes of this
calculation, the aggregate voting stock held by non-affiliates has been assumed
to be equal to the number of outstanding shares of Class A common stock
excluding shares held by all directors and executive officers of the Company and
by holders of shares representing more than 10% of the outstanding Class A
common stock of the Company.
The number of outstanding shares of each of the registrants' classes of common
stock as of February 28, 2007 was 10,986,453 shares of Class A common stock.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for the 2007 Annual Meeting of Shareholders are
incorporated by reference into Part III of this Form 10-K.
FORM 10-K INDEX
Page
Item No. No
-------- ----
Part I
1. Business............................................................. 3
1A. Risk Factors......................................................... 9
1B. Unresolved Staff Comments............................................ 17
2. Properties........................................................... 17
3. Legal Proceedings.................................................... 17
4. Submission of Matters to a Vote of Security Holders.................. 18
Part II
5. Market for Registrant's Common Equity, Related Stockholder Matters
and Issuers Purchases of Equity Securities........................... 18
6. Consolidated Selected Financial Data................................. 20
7. Management's Discussion and Analysis of Financial Condition and
Results of Operations................................................ 22
7A. Quantitative and Qualitative Disclosures About Market Risk........... 28
8. Consolidated Financial Statements and Supplementary Data............. 29
9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure................................................. 55
9A. Controls and Procedures.............................................. 55
Part III
The information required by Items 10 through 14 in this part is omitted
pursuant to Instruction G of Form 10-K. This information will be included
in an amendment to this Form 10-K or a definitive Proxy Statement,
pursuant to Regulation 14A, to be filed not later than 120 days after
December 31, 2006.
Part IV
15. Exhibits and Financial Statement Schedules
(a) Consolidated Financial Statements and Financial Statement Schedules..
(1) Consolidated Financial Statements-See Item 8.
(2) Financial Statement Schedules - All schedules normally required
by Form 10-K are omitted since they are either not applicable or
the required information is shown in the consolidated financial
statements or the notes thereto.
(b) Exhibits............................................................. 56
Signatures............................................................... 62
Exhibit Index............................................................ 63
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This report on Form 10-K has not been approved or disapproved by the Securities
and Exchange Commission nor has the Commission passed upon the accuracy or
adequacy of this report.
The registrant makes forward-looking statements within the "safe harbor"
provisions of the Private Securities Litigation Reform Act of 1995 throughout
this report. These statements relate to the registrant's 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. The registrant's 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. The registrant
undertakes no obligation to update publicly any forward-looking statements for
any reason even if new information becomes available or other events occur in
the future.
Unless otherwise indicated or the context otherwise requires, all references to
"we", "us", "our", "EasyLink", "EasyLink Services", the "Company" and similar
terms refer to EasyLink Services Corporation and its direct and indirect
subsidiaries.
ITEM 1 BUSINESS
COMPANY OVERVIEW
We are a provider of services that facilitate the electronic exchange of
information between enterprises, their trading communities and their customers.
We handle approximately one million transactions per business day that are
integral to the movement of money, materials, products and people in the global
economy such as insurance claims, trade and travel confirmations, purchase
orders, invoices, shipping notices and funds transfers, among many others. We
offer a broad range of information exchange services to businesses and service
providers, including transaction management services, which integrate a range of
services and capabilities that help customers better manage a business process
in addition to delivering a transaction; and transaction delivery services
consisting of electronic data interchange or "EDI" and production messaging
services utilizing e-mail, fax, and telex.
We offer our services to thousands of business customers worldwide including
many of the Fortune Global 500. In 2006, approximately 71% of our revenue was
attributable to our United States business and 29% was attributable to our
business outside the United States. Outside of the United States, we have direct
and/or indirect distribution channels in Brazil, Canada, France, Germany, Hong
Kong, India, Israel, Japan, Korea, Malaysia, Singapore, United Arab Emirates and
the United Kingdom. The United Kingdom is the largest contributor to our
international revenues, as well as the primary location of our network and
servicing infrastructure, outside of the United States. See Note 20 to the
Consolidated Financial Statements contained in Item 8 of this annual report for
additional information relating to our geographical operations.
Our strategy is to expand our position in the information exchange segment of
the electronic commerce market by offering to our large customer base as well as
new customers a tailored set of transaction management and transaction delivery
services that will make our customers more competitive by reducing their costs,
the time it takes them to process transactions, and the error rates associated
with manual business processes. We believe that growth of our business will
result from continued investment by existing and prospective customers in
e-commerce systems. These systems generate transactions requiring delivery of
information to or management of information among a wide range of partners and
customers. We expect that the resulting exchanges of information will occur
across an increasingly complex array of disparate networks, marketplaces,
systems, technologies and locations. We believe that third-party providers of
transaction management and transaction delivery services can substantially
reduce the complexity and cost of operating in this environment. Transaction
management and transaction delivery services will provide substantial benefits
to businesses by migrating people-intensive and paper-based processes to
electronic transaction management and delivery services. We expect that
businesses will achieve these benefits by improving inventory turnover,
accelerating the collection of receivables, automating manual processes,
improving customer satisfaction, optimizing purchasing practices and reducing
waste and overhead costs.
We believe enterprises use our transaction management and transaction delivery
services to reduce the complexity, cost and time associated with deploying and
managing networks to conduct business electronically within all or a part of
their trading and customer communities. For example, we help automate the
collection and processing of claims forms for insurance carriers, converting the
forms submitted by independent agents into electronic information that can be
processed directly by the carriers' claims systems. Also, thousands of companies
of all sizes use our services to streamline the routing and delivery of purchase
orders to and from members of their trading communities. Our customers take
advantage of our ability to accept a transaction in just about any form and from
virtually any environment in which enterprise transactions originate, and
deliver it in just about any form to virtually any other environment, replacing
slow, costly, labor and paper-intensive methods that are in wide use today. We
derive revenue from per-message charges, per-page charges, per-minute charges,
per-character set charges, monthly per-user fees, license fees and
implementation fees.
Typically, our services extend the capabilities and geographic reach of a
customer's e-commerce system. By using our services, a customer can exchange
information in a reliable and secure manner and with the flexibility to adapt to
the diversity of e-commerce systems and applications in use. Our transaction
delivery and transaction management services provide a broad range of
capabilities to enterprises, including the ability to:
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- gain access to and use our services through a variety of commonly used
enterprise e-commerce application platforms including SAP, Oracle, Web
sites, electronic data interchange or EDI systems, proprietary systems
designed and owned by our customers, and others, running on computer
systems from mainframe to desktop PC to handheld computer systems;
- send and receive and transform information using alternative message types,
including EDI, fax, e-mail and telex;
- connect to our network through the methods in common use today, including
the Internet, dedicated or leased lines, frame relay, virtual private
network or VPN and secure dial-up across a phone line;
- deliver information securely using a variety of security protocols,
including IP-SEC; SSL, HTTPS, RSA, S/MIME, PGP and non-repudiation/delivery
confirmation capabilities. We play the role of a trusted third-party in
control of a message from transmission to delivery;
- exchange information with other computer networks using a broad range of
communication protocols that computer networks use to exchange information,
including HTTP, SMTP, TCP/IP, FTP, UNIX/UUCP, Telnet, X400 and IBM
proprietary;
- transform and exchange information in over 200 document types or formats,
including EDI, HTML, XML, PDF, TIFF;
- convert paper and fax transactions into electronic data formats including
EDI and XML, which can be processed directly by customer systems such as
claims systems, purchasing and payment systems, underwriting systems,
workflow systems and databases.
- provide the means for customers to sort, route, review, approve and store
documents electronically within their organization, rather than using paper
and manual methods
Through the ongoing development and introduction of new services, we plan to
continue to build upon our substantial customer base, technology and servicing
assets. We are building these capabilities to increase the accessibility,
security, data translation and document transformation capabilities of our
network.
ON JANUARY 19, 2007, WE ANNOUNCED THAT OUR BOARD OF DIRECTORS HAD FORMED A
COMMITTEE OF INDEPENDENT DIRECTORS TO EVALUATE STRATEGIC ALTERNATIVES FOR US,
WHICH COULD INCLUDE A POTENTIAL BUSINESS COMBINATION TRANSACTION. WE HIRED
AMERICA'S GROWTH CAPITAL AS OUR FINANCIAL ADVISOR ON DECEMBER 22, 2006. AS PART
OF THIS PROCESS, NUMEROUS PARTIES HAVE EXPRESSED INTEREST IN POTENTIALLY
ACQUIRING OUR BUSINESS. WE WILL CONTINUE TO EVALUATE ALL STRATEGIC ALTERNATIVES
TO MAXIMIZE VALUE FOR OUR SHAREHOLDERS.
OUR BUSINESS SERVICES
We offer a range of transaction management and transaction delivery services to
a customer base composed predominantly of business enterprises. The following
chart describes our major service offerings in each category:
SERVICE DESCRIPTION
------- -----------
TRANSACTION MANAGEMENT
SERVICES:
INTEGRATED DESKTOP MESSAGING EasyLink Integrated Desktop Messaging allows
SERVICES our customers to integrate fax sending and
receiving with their existing corporate e-mail
systems and associated administrative systems.
Offered on an outsourced basis, this service
helps align fax communications with existing
electronic workflow systems and procedures,
including employee administration, security and
compliance. In addition to providing user
faxing functionality, the service offers
several key administrative management features
including user administration (including
integration with back office personnel
systems), call detail reporting for internal
accounting support, and private label branding
services.
EASYLINK DOCUMENT CAPTURE AND EasyLink Document Capture and Management
MANAGEMENT SERVICES: Services are a family of services that
significantly reduce the time and expense
associated with receiving and processing
transactions that originate on paper forms by
digitally converting them into usable data that
can be processed directly by enterprise systems
such as production servers, workflow solutions,
and databases. The service family currently
includes:
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EasyLink Fax to E-mail Plus Service is an
enhanced version of Fax to E-mail service with
the ability to route an inbound message based
on the information contained in the faxed
document rather than just to the single e-mail
address associated with the inbound fax number.
EasyLink's Fax to Database Service creates
database records that combine the received
image with associated document information that
is captured and verified from predefined fields
within the image. Database records can be
exported to customer systems or hosted by
EasyLink.
EasyLink Fax to Data Service is a data entry
capability which captures information on a
received form, verifies it with human
operators, and then converts the information
into a 'live' data format such as EDI or XML.
This data is then exported to customer
production systems through various methods.
EasyLink Data Conversion Service enables
companies to exchange data in different data
types, formats and structures. This
bi-directional service enables customers to use
one consistent data format and to communicate
with many other companies which require
different data formats. We support over 100
data formats including XML, EDI, text file,
CSV, Excel and other commonly used proprietary
formats.
EasyLink Workflow Service provides the
capabilities of moving, storing, and retrieving
images and documents electronically within a
workgroup. Typically, this hosted service will
receive documents from another EasyLink service
such as EasyLink Fax to E-mail and provide a
digital workflow and/or document repository for
those documents as a single, seamlessly
integrated solution. Our workflow solution
incorporates customer specific business rules
to support review and approve, search and
retrieve, or collaboration processes.
EASYLINK PRODUCTION MESSAGING EasyLink Production Messaging PM2.0 Service is
PM2.0 SERVICE: an enhanced production messaging service that
enables our customers to automate and
personalize outbound communications with their
global business partners. This service allows
customers to use Internet-based protocols
(SMTP, TLS, FTP, and Secure FTP) and document
structures (HTML, XML and Rich Text Format).
PM2.0 supports multiple delivery options,
including e-mail, fax and file transfer, and
provides network-based document transformation
services including password protection and
encryption of outbound transactions. Our
customers are able to integrate their own
enterprise applications with our PM2.0 services
using application programming interfaces (or
APIs) and are able to administer their use of
PM2.0 services securely over the web. Outbound
transactions delivered via PM2.0 include
electronic brokerage statements, newsletters,
invoices, travel reservations, price
notifications, trade confirmations and other
business critical documents.
TRANSACTION DELIVERY SERVICES:
EDI SERVICES:
EASYLINK EDI SERVICE EasyLink EDI (Electronic Data Interchange)
Service allows our customers to manage the
electronic exchange of business documents (such
as purchase orders and invoices among others)
using standardized formats such as ANSI X.12
and UN-EDIFACT without human intervention. The
EasyLink EDI Service offers businesses all the
key elements needed for traditional EDI
implementation including network, design,
systems, software and implementation support.
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EASYLINK IP-EDI SERVICE The EasyLink IP (Internet Protocol) EDI Service
provides Internet access to EDI, enabling small
to medium sized enterprises to trade with their
major partners in a more cost-effective and
easier to implement manner.
EASYLINK WEB EDI SERVICE EasyLink Web EDI Service provides an
intelligent, browser-based data entry interface
for trading partners to easily and efficiently
exchange business documents electronically. We
typically custom-develop this interface and
associated back-end processing capabilities to
meet the specific application needs and
operating environment of our customer.
EASYLINK PRODUCTION MESSAGING EasyLink Production Messaging Services allow
SERVICES: our customers to deliver high volumes of
mission-critical documents such as invoices,
purchase orders, shipping notices, or bank wire
transfers from virtually any enterprise
environment to global business partners through
various non-EDI message delivery modes
including e-mail, fax, and telex. Typical
applications include on-net conversion of text
files to e-mail, fax and telex formats with
supporting notification of delivery status to
the transaction originator.
REVENUES
Our services generate revenue from per-message charges, per-page charges,
per-minute charges, per-character charges, monthly per-user fees, license fees
and consulting fees. We charge our EDI customers per message. Customers of our
production messaging services and transaction management services pay consulting
fees based upon the level of integration work and set-up requirements plus
per-page or per-minute usage charges, depending on the delivery method, for all
messages successfully delivered by our network. Customers who purchase our
integrated desktop messaging services pay monthly site license fees based on the
number of user seats being deployed plus per page usage charges for all faxes
successfully delivered by our network.
WORLDWIDE SALES AND MARKETING
Our primary marketing objectives are to:
- promote higher usage of our services;
- retain, cross-sell and up-sell our existing customer base;
- grow our new customer and distribution base; and
- build our brand.
We offer our business services in key global markets through multiple sales
channels that include a direct field sales force, a direct telesales
organization, and alternate channels that include value-added resellers, service
aggregators, business technology solutions providers and various types of
telecommunications providers. Our own sales organization targets mid- and
large-size companies - typically those having greater than 2,000 employees, and
in some cases smaller organizations that have a disproportionately large need
for one or more of our services. We employ various marketing techniques to
generate activity for our sales channels, including advertising, telemarketing
and exhibiting at trade shows.
CUSTOMER SUPPORT
Customer support is available by e-mail or telephone 24x7x365 and is staffed by
experienced technical support engineers and customer service representatives.
EasyLink Services provides a number of different types of support, including
e-mail support, phone support and technical support. Our principal customer
support operations are located in the USA and the UK.
E-mail support: Customers can contact the customer service organization via
e-mail. Inbound e-mails are managed using e-mail management software, allowing
customer service to view the history of each customer, prioritize issues based
on customer status, classify topic issues and route issues to appropriate
customer service representatives.
Telephone support: Inbound phone calls are managed using an Automated Call
Distribution (ACD) system that directs call-prioritization and skill-based
routing. Additionally, proprietary and commercial applications are used to
capture customer phone contact information and
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maintain customer contact history files.
Technical support: The customer support teams include technical support
engineers. Technical support engineers provide internal subject matter expertise
to customer service representatives, analyze root causes for customer contacts,
and recommend improvements to products, tools, knowledge bases and training.
TECHNOLOGY
EASYLINK SERVICES NETWORK
Our network is a distributed, managed IP-based global network that supports all
of our transaction management and transaction delivery services. Our distributed
message network is built upon a combination of highly reliable computer systems
dispersed around the world. We strive to operate our message systems at 99.5%
availability to ensure continuous reliability for our customers' business
critical applications.
The message systems are located at various operational centers in the United
States as well as in the United Kingdom. The operational centers are located in
major metropolitan centers with easy access to major network providers. This
enables us to easily address facility growth. It also allows efficient access to
our major customers and potential markets. All of our operational centers are
secured with continuous power supply. During 2006 we completed the migration of
a portion of our network related to the business acquired from AT&T Corp. in
2001 to our new headquarters in Piscataway, NJ. This network facility had
resided on AT&T Corp.'s premises under an agreement with AT&T Corp., but was
being operated and maintained by us.
Our messaging nodes are connected by a managed IP-based backbone. The IP
backbone is constantly monitored by our operational centers. This allows for
diverse routing and efficient management of volumes so that customers do not
experience delays in the routing of messages. If a remote node does experience a
problem, messages for many of our services can be re-routed to prevent delays in
transaction delivery. We maintain firewalls to prevent unsolicited intrusions
from the Internet. Any unauthorized attempt is tracked and investigated. The
constant monitoring of the network ensures integrity of all messages within our
network.
We offer our customers a wide range of secure access methods into our network.
Access methods can include MQ, X.25, dedicated point-to-point circuits, frame
relay, and virtual private networks (VPN). Our operational centers work in
conjunction with our customers to ensure the constant availability of access
into the network and any circuit problems are proactively reported.
TELECOMMUNICATIONS SERVICES
On July 21, 2005, we entered into a Master Carrier Agreement (MCA) with AT&T
Corp. for the purchase of switched services, private lines, frame relay service,
asynchronous transport mode service and Internet service. Under the MCA, we have
a minimum purchase commitment in the aggregate for all of the above services of
$5 million over the 2-year term of the agreement. Through December 31, 2006 we
had purchased services of approximately $4.8 million and anticipate meeting the
minimum commitment by the end of the contract term in 2007. We have also
committed to purchase from Verizon Business Services (formerly MCI Worldcom) a
minimum of $900,000 per 12-month period in other telecommunications services
through March 2007. As of December 31, 2006 we had already met this commitment.
COMPETITION
Depending on the particular service that we offer, we compete with a range of
companies in the transaction management services and transaction delivery
services markets, including both premises-based and service-based solutions
providers. We believe that our ability to compete successfully will depend upon
a number of factors, including market presence; the capacity, reliability and
security of our network infrastructure; the pricing policies of our competitors
and suppliers; the timing of introductions of new services and service
enhancements by us and our competitors; and industry and general economic
trends.
Competition in the transaction management and transaction delivery sectors
varies. Our competitors in the integrated desktop messaging and production
messaging markets include Premier Global Services' Xpedite Services and J2
Global Communications as well as a number of smaller, regional providers around
the world. Competition in the document capture and management services markets
is primarily in the form of software-based solutions customers deploy and
operate themselves, as well as a number of small, regional service bureau
companies. Competitors in the EDI and trading community enablement services
markets include Inovis, Internet Commerce Corp., GXS, and Sterling Commerce,
Inc., a subsidiary of AT&T Corp.
Many of these competitors have greater market presence, engineering and
marketing capabilities, and/or technological, financial and personnel resources
than those available to us. As a result, they may be able to develop and expand
their communications and network infrastructures more quickly, adapt more
swiftly to new or emerging technologies and changes in customer requirements,
take advantage
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of acquisition and other opportunities more readily, and devote greater
resources to the marketing and sale of their products and services. In addition,
current and potential competitors have established or may establish cooperative
relationships among themselves or with third parties to increase the ability of
their services to address the needs of our current and prospective customers.
Accordingly, it is possible that new competitors or alliances among competitors
may emerge and rapidly acquire significant market share. In addition to direct
competitors, many of our larger potential customers may seek to internally
fulfill their needs through the deployment of their own on premises messaging
systems.
INTELLECTUAL PROPERTY
Our intellectual property is among our most valued assets. We protect our
intellectual property, technology and trade secrets primarily through contract,
copyrights, trademarks, trade secret laws, restrictions on disclosure and other
methods. Parties with whom we discuss, or to whom we show, proprietary aspects
of our technology, including employees and consultants, are required to sign
confidentiality and non-disclosure agreements. If we fail to protect our
intellectual property effectively, our business, operating results and financial
condition may suffer. In addition, litigation may be necessary in the future to
enforce our intellectual property rights, to protect our trade secrets or to
determine the validity and scope of the proprietary rights of others.
Notwithstanding these protections, there is a risk that a third party could copy
or otherwise obtain and use our technology or trade secrets without
authorization. In addition, others may independently develop substantially
equivalent technology. The precautions we take may not prevent misappropriation
or infringement of our technology.
We have patents related to our faxSAV Connector and our "e-mail Stamps" security
technology incorporated into our e-mail to fax service.
As part of a settlement entered into in September 1998, NetMoves Corporation,
which we acquired in February 2000 and which is now known as EasyLink Services
USA, Inc., received a perpetual license from AudioFAX IP, L.L.P. to use certain
of AudioFAX's patents relating to store-and-forward technology. This license is
fully paid-up.
On February 8, 2007, we settled the litigation entitled Dynamic Depth, Inc. vs.
EasyLink Services Corporation in which Dynamic Depth claimed infringement by us
of United States patent number 5,461,488 related to automatic OCR-based routing.
The terms of the settlement are confidential. As a result of this settlement
Dynamic Depth agreed that it would take no further legal action nor bring any
future charge of infringement of the related patent against us. We have
determined that the terms of the settlement will not have a material effect upon
us or our business.
From time to time, third parties have asserted claims against us that our
services employ technology covered by their patents. There can be no assurance
that third parties will not assert additional infringement claims against us in
the future. Patents have been granted recently on fundamental technologies in
the communications and desktop software areas, and patents may be issued that
relate to fundamental technologies incorporated into our services. As patent
applications in the United States are not publicly disclosed until the patent is
issued, applications may have been filed that, if issued as patents, could
relate to our services. It is also possible that claims could be asserted
against us because of the sending of messages over our network or the content of
these messages. We could incur substantial costs and diversion of management
resources with respect to the defense of any claims that we have infringed upon
the proprietary rights of others, which costs and diversion could have a
material adverse effect on our business, financial condition and results of
operations. Furthermore, parties making these claims could secure a judgment
awarding substantial damages, as well as injunctive or other equitable relief
that could effectively block our ability to license and sell our services in the
United States or abroad. Any judgment of this sort could have a material adverse
effect on our business, financial condition and results of operations. In the
event a claim relating to proprietary technology or information is asserted
against us, we may seek licenses to the relevant intellectual property. There
can be no assurance, however, that licenses could be obtained on terms
acceptable to us, or at all. The failure to obtain any necessary licenses or
other rights could have a material adverse effect on our business, financial
condition and results of operations.
We incorporate licensed, third-party technology in our services. In these
license agreements, the licensors have generally agreed to defend, indemnify and
hold us harmless with respect to any claim by a third party that the licensed
software infringes any patent or other proprietary right. The outcome of any
litigation between these licensors and a third party or between us and a third
party may lead to our having to pay royalties for which we are not indemnified
or for which such indemnification is insufficient, or we may not be able to
obtain additional licenses on commercially reasonable terms, if at all. In the
future, we may seek to license additional technology to incorporate in our
services. The loss of or inability to obtain or maintain any necessary
technology licenses could result in delays in introduction of new services or
curtailment of existing services, which could have a material adverse effect on
our business, results of operations and financial condition.
MISCELLANEOUS
We are a Delaware corporation and were incorporated on August 1, 1994. As of
December 31, 2006 we had 310 employees.
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ITEM 1A
RISK FACTORS
WE HAVE INCURRED LOSSES FROM OPERATIONS IN PRIOR YEARS.
We incurred losses from continuing operations of $1.0 million and $1.1 million
in 2006 and 2005, respectively. We achieved income from continuing operations of
$7.7 million for a full fiscal year for the first time in 2004, but this
included $5.0 million from the sale of businesses and $1.0 million of gain from
debt restructuring, both before income taxes. We had net income of $50.9 million
for the year ended December 31, 2003; however, the net income for 2003 included
$54.1 million of gains on debt restructuring and settlements. For years prior to
2003 and since we commenced operations in 1996, we incurred net losses in every
year. As a result, we had an accumulated deficit of $541.8 million as of
December 31, 2006. For the years ended December 31, 2005 and 2004 reports from
our independent registered public accountants contained an explanatory
paragraph stating that we had a working capital deficiency and an accumulated
deficit among other factors that raised substantial doubt about our ability to
continue as a going concern. See Note 1(b) to the Consolidated Financial
Statements contained in Item 8 of this annual report.
We have experienced declining revenues in each of the years ended December 31,
2006, 2005 and 2004 as compared to the prior year. See Part II, Item 7,
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" of this annual report. If we do not succeed in maintaining or
increasing our revenues, our losses may continue.
WE MAY INCUR MATERIAL INCOME TAX LIABILITIES AS A RESULT OF THE ELIMINATION OF
OUTSTANDING DEBT PURSUANT TO OUR 2003 DEBT RESTRUCTURING
The elimination of outstanding debt pursuant to our debt restructuring completed
in 2003 and prior years resulted in substantial cancellation of debt income for
income tax purposes. We minimized income tax payable as a result of the
restructuring by, among other things, offsetting the income with our historical
net operating losses and otherwise reducing the income in accordance with
applicable income tax rules. As a result, we did not incur any material current
income tax liability from the elimination of this debt. However, the relevant
tax authorities may challenge our income tax positions, including the use of our
historical net operating losses to offset some or all of the cancellation of
debt income and the application of the income tax rules reducing the
cancellation of debt income. If we are not able to offset or otherwise reduce
the cancellation of debt income, we may incur material income tax liabilities as
a result of the elimination of debt and we may be unable to pay these
liabilities.
WE MAY INCUR SUBSTANTIAL ADDITIONAL INDEBTEDNESS IN THE FUTURE
We may incur substantial additional indebtedness in the future. The level of our
indebtedness, among other things, could (1) make it difficult for us to make
payments on our indebtedness, (2) make it difficult to obtain any necessary
financing in the future for working capital, capital expenditures, debt service
requirements or other purposes, (3) limit our flexibility in planning for, or
reacting to changes in, our business, and (4) make us more vulnerable in the
event of a downturn in our business.
WE MAY NEED TO RAISE CAPITAL IN THE FUTURE TO INVEST IN THE GROWTH OF OUR
BUSINESS AND TO FUND NECESSARY EXPENDITURES.
At December 31, 2006, we had $6.7 million of cash and cash equivalents. Our
principal fixed commitments consist of obligations under a credit facility,
obligations under capital leases, obligations under office space leases,
accounts payable and other current obligations, commitments for capital
expenditures and commitments for telecommunications services. We may need
additional financing to invest in the growth of our business and to pay other
obligations, and the availability of this financing when needed, on terms
acceptable to us, or at all, is uncertain. If we are unable to raise additional
financing, generate sufficient cash flow, or restructure our debt obligations
before they become due and payable, we may be unable to continue as a going
concern.
If we raise additional funds by issuing equity securities or debt convertible
into equity securities, stockholders may experience significant dilution of
their ownership interest. The amount of dilution resulting from issuance of
additional shares of Class A common stock and securities convertible into Class
A common stock and the potential dilution that may result from future issuances
has significantly increased in light of the decline in our stock price.
Moreover, we could issue preferred stock that has rights senior to those of the
Class A common stock. Some of our stockholders have registration rights that
could interfere with our ability to raise needed capital. If we raise funds by
issuing debt, our lenders may place limitations on our operations, including our
ability to pay dividends, although we do not anticipate paying any cash
dividends on our stock in the foreseeable future.
WHERE RESOURCES PERMIT, WE INTEND TO CONTINUE TO ACQUIRE, OR MAKE STRATEGIC
INVESTMENTS IN, OTHER BUSINESSES AND ACQUIRE OR LICENSE TECHNOLOGY AND OTHER
ASSETS AND WE MAY HAVE DIFFICULTY INTEGRATING THESE BUSINESSES OR GENERATING AN
ACCEPTABLE RETURN.
We have completed a number of acquisitions and strategic investments since our
initial public offering in 1999. We also acquired Swift Telecommunications, Inc.
and the EasyLink Services business that it had contemporaneously acquired from
AT&T Corp. On August 1,
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2005, we acquired Quickstream Software, Inc. Where resources permit, we will
continue our efforts to acquire or make strategic investments in businesses and
to acquire or license technology and other assets, and any of these acquisitions
may be material to us. We cannot assure you that acquisition or licensing
opportunities will continue to be available on terms acceptable to us or at all.
These 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;
- need for additional capital to fund losses of acquired businesses;
- inability to successfully incorporate acquired technology into our service
offerings and maintain uniform standards, controls, procedures and
policies; and
- lack of the necessary experience to enter new markets.
We may not successfully overcome problems encountered in connection with
potential acquisitions. In addition, an acquisition could materially impair our
operating results by diluting our stockholders' equity, causing us to incur
additional debt or requiring us to incur acquisition expenses or amortize or
depreciate acquired intangible and tangible assets or to incur impairment
charges as a result of the write-off of assets, including goodwill, recorded as
a result of an acquisition.
OUTSOURCING OF TRANSACTION MANAGEMENT SERVICES MAY NOT PROVE TO BE A VIABLE
BUSINESS.
An important part of our business strategy is to leverage our existing global
customer base and global network by continuing to provide our existing
transaction delivery services and by offering these customers additional
transaction delivery and new transaction management services in the future. The
market for transaction management services is only beginning to develop. Our
success will depend on the development of viable markets for the outsourcing of
new transaction management services which is somewhat speculative.
There are significant obstacles to the full development of a sizable market for
the outsourcing of transaction management services. Outsourcing is one of the
principal methods by which we will attempt to reach the size we believe is
necessary to be successful. Security and the reliability of service, however,
are likely to be of concern to enterprises and service providers deciding
whether to outsource their transaction management or to continue to provide it
themselves. These concerns are likely to be particularly strong at larger
businesses and service providers, which are better able to afford the costs of
maintaining their own systems. While we intend to focus exclusively on our
outsourced transaction management and transaction delivery 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 MANAGEMENT AND TRANSACTION DELIVERY SERVICES MAY BE UNSUCCESSFUL.
As part of our business strategy, we plan to develop and offer to existing
customers additional transaction management and transaction delivery 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 management and transaction delivery
services are not yet well defined and some businesses and service providers may
not be willing to pay the fees we wish to charge. We cannot assure you that the
fees we intend to charge will be sufficient to offset the related costs of
providing these services.
WE MAY FAIL TO MEET MARKET EXPECTATIONS BECAUSE OF FLUCTUATIONS IN OUR QUARTERLY
OPERATING RESULTS, WHICH WOULD CAUSE OUR STOCK PRICE TO DECLINE.
We may experience significant fluctuations in our quarterly results. It is
likely that our operating results in some quarters will be below market
expectations. In this event, the price of our Class A common stock is likely to
decline. The following are among the factors that could cause significant
fluctuations in our operating results:
10
- incurrence of other cash and non-cash accounting charges, including charges
resulting from acquisitions or dispositions of assets, including from
write-downs of impaired assets;
- 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 and 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;
- system outages, delays in obtaining new equipment or problems with planned
upgrades;
- disruption or impairment of the Internet;
- demand for outsourced transaction management and transaction delivery
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
management and transaction delivery services in particular; and
- general economic and market conditions and global political factors.
SEVERAL OF OUR COMPETITORS HAVE SUBSTANTIALLY GREATER RESOURCES, LONGER
OPERATING HISTORIES, LARGER CUSTOMER BASES AND BROADER PRODUCT OFFERINGS.
Our business is, and we believe will continue to be, intensely competitive. See
"Part I Item 1, "Business - Competition" of this annual report.
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 management or transaction delivery 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.
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 that may have a material adverse effect on our business,
financial condition and results of operations.
IT IS DIFFICULT TO RETAIN KEY PERSONNEL AND ATTRACT ADDITIONAL QUALIFIED
EMPLOYEES IN OUR BUSINESS AND THE LOSS OF KEY PERSONNEL AND THE BURDEN OF
ATTRACTING ADDITIONAL QUALIFIED EMPLOYEES MAY IMPEDE THE OPERATION AND GROWTH OF
OUR BUSINESS AND CAUSE OUR REVENUES TO DECLINE.
Our future success depends to a significant extent on the continued service of
our key technical, sales and senior management personnel, but they have no
contractual obligation to remain with us. In particular, our success depends on
the continued service of Thomas F.
11
Murawski, our President and Chief Executive Officer, and Michael A. Doyle, our
Vice President and Chief Financial Officer. The loss of the services of Mr.
Murawski or Mr. Doyle, or several other key employees, would impede the
operation and growth of our business.
To manage our existing business and handle any future growth, we will have to
attract, retain and motivate additional highly skilled employees. In particular,
we will need to hire and retain qualified sales people if we are to meet our
sales goals. We will also need to hire and retain experienced and skilled
technical personnel in order to meet the increasing technical demands of our
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, customers may cease using our services. In
addition, our agreements with several of our customers establish minimum
performance standards. If we fail to meet these standards, our customers could
terminate their relationships with us and assert claims for service fee rebates
or monetary damages.
WE MAY NEED TO UPGRADE SOME OF OUR COMPUTER SYSTEMS TO ACCOMMODATE INCREASES IN
TRAFFIC AND TO ACCOMMODATE INCREASES IN THE USAGE OF OUR SERVICES, BUT WE MAY
NOT BE ABLE TO DO SO WHILE MAINTAINING OUR CURRENT LEVEL OF SERVICE, OR AT ALL.
We must continue to expand and adapt our computer systems as the number of
customers and the amount of information they wish to transmit increases and as
their requirements change, and as we further develop our services. Because we
have only been providing some of our services for a limited time, and because
our computer systems for these services have not been tested at greater
capacities, we cannot guarantee the ability of our computer systems to connect
and manage a substantially larger number of customers or meet the needs of
business customers at high transmission speeds. If we cannot provide the
necessary service while maintaining expected performance, our business would
suffer and our ability to generate revenues through our services would be
impaired.
The expansion and adaptation of our computer systems will require substantial
financial, operational and managerial resources. We may not be able to
accurately project the timing of increases in traffic or other customer
requirements. In addition, the very process of upgrading our computer systems
could cause service disruptions. For example, we may need to take various
elements of the network out of service in order to install some upgrades.
OUR COMPUTER SYSTEMS MAY FAIL AND INTERRUPT OUR SERVICE.
Our customers have in the past experienced interruptions in our services. We
believe that these interruptions will continue to occur from time to time. These
interruptions are due to hardware failures, failures in telecommunications and
other services provided to us by third parties and other computer system
failures. These failures have resulted and may continue to result in significant
disruptions to our service. Some of our operations have redundant switch-over
capability. Although we plan to install backup computers and implement
procedures on other parts of our operations to reduce the impact of future
malfunctions in these systems, the presence of single points of failure in our
network increases the risk of service interruptions. In addition, substantially
all of our computer and communications systems relating to our services are
currently located in Piscataway and Jersey City, New Jersey; Columbus, Ohio, and
London, England. We currently do not have alternate sites from which we could
conduct a major portion of these operations in the event of a disaster. Our
computer and communications hardware is vulnerable to damage or interruption
from fire, flood, earthquake, power loss, telecommunications failure and similar
events. Our services would be suspended for a significant period of time if any
of our primary data centers was severely damaged or destroyed. We might also
lose customer transaction documents and other customer files, causing
significant customer dissatisfaction and possibly giving rise to claims for
monetary damages.
OUR SERVICES WILL BECOME LESS DESIRABLE OR OBSOLETE IF WE ARE UNABLE TO KEEP UP
WITH THE RAPID CHANGES CHARACTERISTIC TO OUR BUSINESS.
Our success will depend on our ability to enhance our existing services and to
introduce new services in order to adapt to rapidly changing technologies,
industry standards and customer demands. To compete successfully, we will have
to accurately anticipate changes in business demand and add new features to our
services very rapidly. We may not be able to develop or integrate the necessary
technology into our computer systems on a timely basis or without degrading the
performance of our existing services. We cannot be sure that, once integrated,
new technology will function as expected. Delays in introducing effective new
services could cause existing and potential customers to forego use of our
services.
12
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 management or
transaction delivery service, and presents a number of challenges for us. If we
are unable to maintain the security of our service, our reputation and our
ability to attract and retain customers may suffer, and we may be exposed to
liability. Third parties may attempt to breach our security or that of our
customers whose networks we may maintain or for whom we provide services. If
they are successful, they could obtain information that is sensitive or
confidential to a customer or otherwise disrupt a customer's operations or
obtain confidential information, including our customer's profiles, passwords,
financial account information, credit card numbers, message content, stored
e-mail or other personal or business information or similar information relating
to our customer's customers. Our customers or their employees or customers may
assert claims for money damages for any breach in our security and any breach
could harm our reputation. Our computers are vulnerable to computer viruses,
physical or electronic break-ins, denial of service attacks and similar
incursions, which could lead to interruptions, delays or loss of data. We expect
to expend significant capital and other resources to license or create
encryption and other technologies to protect against security breaches or to
alleviate problems caused by any breach. Nevertheless, these measures may prove
ineffective. Our failure to prevent security breaches may expose us to liability
and may adversely affect our ability to attract and retain customers and develop
our business market. Security measures taken by others may interfere with the
efficient operation of our service, which may harm our reputation and adversely
impact our ability to attract and retain customers. "Firewalls" and similar
network security software employed by third parties can interfere with the
operation of our services.
Our customers are subject to, and in turn require that their service providers
meet, increasingly strict guidelines for network and operational security. If we
are unable to meet the security requirements of a customer, we may be unable to
obtain or keep their business. This is particularly the case for customers in
the health insurance and financial services industries, which are subject to
legal requirements governing the security and confidentiality of customer
information.
WE ARE DEPENDENT ON LICENSED TECHNOLOGY AND THIRD PARTY COMMERCIAL PARTNERS.
We license a significant amount of technology from third parties, including
technology related to our Internet fax services, billing processes and
databases. We also rely on third party commercial partners to provide services
for our trading community enablement services, document capture and management
services and some of our other services. We anticipate that we will need to
license additional technology or to enter into additional commercial
relationships to remain competitive. We may not be able to license these
technologies or to enter into arrangements with prospective commercial partners
on commercially reasonable terms or at all. Third-party licenses and strategic
commercial relationships expose us to increased risks, including risks relating
to the integration of new technology, the diversion of resources from the
development of our own proprietary technology, a greater need to generate
revenues sufficient to offset associated license or service fee costs, and the
possible termination of or failure to renew an important license or other
agreement by the third-party licensor or commercial partner.
IF THE INTERNET AND OTHER THIRD-PARTY NETWORKS ON WHICH WE DEPEND TO DELIVER OUR
SERVICES BECOME INEFFECTIVE AS A MEANS OF TRANSMITTING DATA, THE BENEFITS OF OUR
SERVICE MAY BE SEVERELY UNDERMINED.
Our business depends on the effectiveness of the Internet as a means of
transmitting data. Any deterioration in the performance of the Internet as a
whole could undermine the benefits of our services. We also depend on
telecommunications network suppliers such as AT&T Corp., Verizon Business
Services and XO Communications for a variety of telecommunications and Internet
services. If regulations or other changes in the industry lead to a charge
associated with the sending or receiving of e-mail messages, the cost of
providing our services would increase and, if significant, could materially
adversely affect our business, financial condition and results of operations.
OUR INTERNATIONAL OPERATIONS ARE SUBJECT TO SIGNIFICANT RISKS AND OUR OPERATING
RESULTS MAY SUFFER IF OUR REVENUES FROM INTERNATIONAL OPERATIONS DO NOT EXCEED
THE COSTS OF THOSE OPERATIONS.
We operate in international markets. We may not be able to compete effectively
in these markets. If our revenues from international operations do not exceed
the expense of establishing and maintaining these operations, our operating
results will suffer. We face significant risks inherent in conducting business
internationally, such as:
- uncertain demand in foreign markets for transaction management and
transaction delivery services;
- difficulties and costs of staffing and managing international operations;
- differing technology standards;
13
- 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;
- terrorism; and
- difficulties in enforcing contracts and potentially adverse consequences.
REGULATION OF TRANSACTION MANAGEMENT AND TRANSACTION DELIVERY SERVICES AND
INTERNET USE IS EVOLVING AND MAY ADVERSELY IMPACT OUR BUSINESS.
With some exceptions, online activity is not currently subject to U.S. laws and
regulations that differ from those applicable to offline activities. Laws and
regulations have been enacted to regulate activity that occurs only on the
Internet (such as laws regulating the sending of unsolicited e-mail
advertisements and electronic signatures), or to limit the applicability of
existing laws and regulations in the online environment (such as limiting
copyright and tort liability for user-provided content). In the future, however,
additional laws and regulations may be adopted at both the state and federal
level to address issues such as user privacy, data security, marketing, pricing,
and the characteristics and quality of products and services in the online
context specifically.
We believe that our services are "information services" under the
Telecommunications Act of 1996 and existing precedent and therefore would not
currently be subject to traditional U.S. telecommunication services regulation.
However, while the Federal Communications Commission ("FCC") historically has
refrained from extensive regulation of entities that provide service using the
Internet or IP, it has recently begun to impose at least some regulatory
paradigms on these services as they increasingly are used as substitutes for
traditional communications services. For example, the FCC already has required
certain providers of voice over Internet Protocol ("VoIP") telephony to provide
enhanced 911 capability to their customers and to accommodate requests by law
enforcement to permit electronic surveillance. These requirements are likely to
create additional costs. In addition, the FCC is currently considering whether
to impose certain obligations on providers of Internet-based and IP-based
services generally, including VoIP. These potential rules could include
requirements to ensure access for disabled persons, contribute to universal
service funds, and pay for using the public telephone network. Any of these
requirements, if applicable to a given service, could increase the cost of
providing that service. The FCC is also examining whether and how to
differentiate among Internet-based and IP-based services to determine which
services should be subject to particular regulatory obligations. It cannot be
predicted whether these rules will be adopted and, if so, whether they would be
applied to our non-voice services.
Moreover, although the FCC has indicated that it views certain Internet-based
services as being interstate and thus subject to the protection of federal laws
that warrant preemption of state efforts to impose traditional common carrier
regulation on these services, the FCC's efforts are currently under legal
challenge and we cannot predict the outcome of state efforts to regulate such
services or the scope of federal policy to preempt these efforts.
Apart from these issues, federal and state regulations could change in a manner
that increases the contributions required by telecommunications carriers, which
would in turn increase our costs in purchasing these telecommunications
services. Providers are authorized to pass their contribution costs on to their
customers; our costs for telecommunications services that we purchase thus
reflect these amounts. The contributions are currently calculated as a
percentage of telecommunications services revenues. Alternative contribution
methodologies, such as the imposition of a fee per telephone line, and other
changes have been proposed that could increase these amounts and thus our costs
in purchasing such telecommunications services. If adopted, these changes may in
turn require us to raise the price of one or more of our services to our
customers. No assurance can be given that we will be able to recover all or part
of any increase in costs that may result from these changes if adopted by the
FCC or that such changes will not otherwise adversely affect the demand for our
services.
14
WE ARE AND MAY BECOME SUBJECT TO LAWS AND REGULATIONS PROTECTING PERSONAL AND
OTHER CONFIDENTIAL INFORMATION IN CONNECTION WITH THE EXCHANGE OF THIS
INFORMATION BY OUR CUSTOMERS USING OUR SERVICES.
We and our customers are subject to laws and regulations protecting personal and
other confidential information in connection with the exchange of this
information by these customers using our services. At present, in the United
States, interactive Internet-based service providers have substantial legal
protection for the transmission of third-party content that is infringing,
defamatory, pornographic or otherwise illegal. We cannot guarantee that a U.S.
court would not conclude that we do not qualify for these protections as an
interactive service provider. We do not and cannot screen all of the content
generated and received by users of our services or the recipients of messages
delivered through our services. Some foreign governments, such as France and
Germany, have enforced content-related laws and regulations against Internet
service providers.
DOMESTIC AND FOREIGN REGULATORY REQUIREMENTS COULD HAVE A MATERIAL ADVERSE
EFFECT ON OUR BUSINESS, FINANCIAL CONDITION AND RESULTS OF 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 these countries, and the failure to satisfy
these requirements may prevent us from installing Internet-capable fax nodes in
these countries or require us to limit the functionality of these nodes. The
failure to deploy a number of such nodes could have a material adverse effect on
our business, financial condition and results of operations.
Our fax nodes and telex switches utilize encryption technology. The export of
this encryption technology is regulated by the United States government. We have
authority for the export of this encryption technology except to countries such
as Cuba, Iran, Libya, North Korea, Syria and Sudan. Nevertheless, there can be
no assurance that this 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 these 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 of these
export restrictions, the unlawful exportation of our services or new legislation
or regulation could have a material adverse effect on our business, financial
condition and results of operations.
The legal structure and scope of operations of our subsidiaries in some foreign
countries may be subject to restrictions that could severely limit our ability
to conduct business in these countries. To the extent that we develop or offer
messaging or other services in foreign countries, we will be subject to the laws
and regulations of those countries. The laws and regulations relating to the
Internet and telecommunications services in many countries are evolving and in
many cases are more burdensome than U.S. law and/or unclear as to their
application. For example, in India, the Peoples Republic of China, and other
countries, we may be subject to licensing requirements with respect to the
activities in which we propose to engage and we may also be subject to foreign
ownership limitations or other approval requirements that preclude our ownership
interests or limit our ownership interests to up to specified percentages of the
entities through which we propose to conduct any regulated activities. If these
limitations apply to our activities (including activities conducted through our
subsidiaries), our opportunities to generate revenue will be reduced, our
ability to compete successfully in these markets will be adversely affected, our
ability to raise capital in the private and public markets may be adversely
affected, and the value of our investments and acquisitions in these markets may
decline. Moreover, to the extent we are limited in our ability to engage in
certain activities or are required to contract for these services from a
licensed or authorized third party, our costs of providing our services will
increase and our ability to generate profits may be adversely affected.
OUR INTELLECTUAL PROPERTY RIGHTS ARE CRITICAL TO OUR SUCCESS, BUT MAY BE
DIFFICULT TO PROTECT.
We regard our copyrights, service marks, trademarks, trade secrets, domain names
and similar intellectual property as critical to our success. We rely on
trademark and copyright law, trade secret protection and confidentiality and/or
license agreements with our employees, customers, strategic partners and others
to protect our proprietary rights. Despite our precautions, unauthorized third
parties may improperly obtain and use information that we regard as proprietary.
Third parties may submit false registration data attempting to transfer key
domain names to their control. Our failure to pay annual registration fees for
domain names may result in the loss of these domains to third parties.
The status of United States patent protection for software products and services
is not well defined and will evolve as additional patents are granted. The
United States Patent and Trademark Office has filed an office action rejecting
the claims in a patent application that we filed. Although we may continue to
pursue this patent application in its current or a modified form, we do not know
if our application will be issued with the scope of the claims we seek or at
all. The laws of some foreign countries do not protect proprietary rights to the
same extent as do the laws of the United States. Our means of protecting our
proprietary rights in the United States or abroad may not be adequate and
competitors may independently develop similar technology.
15
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 or whether third parties will assert
additional infringement claims against us in the future. Because patent
applications in the United States are not publicly disclosed until the patent is
issued, applications may have been filed that relate to our services. If we fail
to protect our intellectual property effectively, our business, financial
condition and results of operations may suffer.
We have been and may continue to be subject to legal proceedings and claims from
time to time in the ordinary course of our business, including claims related to
the use of our domain names and claims of alleged infringement of the trademarks
and other intellectual property rights of third parties.
WE MAY INCUR EXPENSES AND LIABILITIES AS A RESULT OF PENDING LEGAL PROCEEDINGS.
The Company is involved in legal proceedings that may result in additional
expenses or liability. See Part I, Item 3, "Legal Proceedings" of this annual
report. These proceedings include a broker's fee dispute in which we
successfully appealed a $928,000 judgment imposed on us and is currently subject
to appeal. Although we intend to pursue our defense of these matters vigorously,
no assurance can be given that our efforts will be successful. To the extent we
are not successful, it may be required to pay any judgment that may be rendered
in such proceeding. We cannot assure you that our ultimate liability, if any, in
connection with these matters will not have a material adverse effect on our
business, financial condition or results of operations.
A SUBSTANTIAL AMOUNT OF OUR COMMON STOCK MAY COME ONTO THE MARKET IN THE FUTURE,
WHICH COULD DEPRESS OUR STOCK PRICE.
Sales of a substantial number of shares of our common stock in the public market
could cause the market price of our Class A common stock to decline. As of
February 28, 2007, we had an aggregate of 10,986,453 shares of Class A common
stock outstanding. In addition, the following were also outstanding as of
February 28, 2007; options to purchase 959,643 shares of Class A common stock,
restricted stock awards for 124,852 shares of Class A common stock and warrants
to purchase 159,705 shares of Class A common stock.
Except for approximately 1.8 million shares issued in a private placement in
April 2006, substantially all of the shares of our outstanding Class A common
stock are freely tradable, in some cases subject to the volume and manner of
sale limitations contained in Rule 144. We may issue large amounts of additional
Class A common stock, which may also be sold and which could adversely affect
the price of our stock. Approximately 4.7 million of our outstanding shares were
issued in connection with the elimination of debt in 2003. If the holders of
these shares sell large numbers of shares, these holders could cause the price
of our Class A common stock to fall.
OUR 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 BE EXPOSED TO POTENTIAL RISKS RELATING TO OUR INTERNAL CONTROLS OVER
FINANCIAL REPORTING AND OUR ABILITY TO HAVE THOSE CONTROLS ATTESTED TO BY OUR
INDEPENDENT AUDITORS.
As directed by Section 404 of the Sarbanes-Oxley Act of 2002 ("SOX 404"), the
Securities and Exchange Commission adopted rules requiring public companies to
include a report of management on a registrant's internal controls over
financial reporting in its annual reports, including Form 10-K. In addition, the
independent registered public accounting firm auditing a registrant's financial
statements must also attest to and report on management's assessment of the
effectiveness of the registrant's internal controls over financial reporting as
well as the operating effectiveness of the registrant's internal controls. We
were not subject to these requirements for the year ended December 31, 2006 or
2005. We have commenced the process for the implementation of SOX 404 reporting
in 2007.
While we expect to expend significant resources in developing the necessary
documentation and testing procedures required by SOX 404, there is a risk that
we will not comply with all of the requirements imposed. We cannot assure you
that we will receive a positive attestation from our independent auditors. In
the event we identify significant deficiencies or material weaknesses in our
internal controls that we cannot remediate in a timely manner or we are unable
to receive a positive attestation from our independent auditors in 2008 with
respect to our internal controls, investors and others may lose confidence in
the reliability of our financial statements, our stock price may decline and our
ability to obtain equity or debt financing could suffer.
16
\
ANTI-TAKEOVER PROVISIONS COULD NEGATIVELY IMPACT OUR STOCKHOLDERS.
Provisions of Delaware law and of our certificate of incorporation and bylaws
could make it more difficult for a third-party to acquire control of us. For
example, we are subject to Section 203 of the General Corporation Law of the
State of Delaware, which would make it more difficult for another party to
acquire us without the approval of our board of directors. Additionally, our
certificate of incorporation authorizes our board of directors to issue
preferred stock without requiring any stockholder approval, and preferred stock
could be issued as a defensive measure in response to a takeover proposal. These
provisions could make it more difficult for a third party to acquire us even if
an acquisition might be in the best interest of our stockholders.
ITEM 1B UNRESOLVED STAFF COMMENTS
Not applicable.
ITEM 2 PROPERTIES
UNITED STATES
Our headquarters are located in Piscataway, New Jersey where we occupy
approximately 67,000 square feet of office, development lab and network space
under a lease expiring in 2013. In addition, we have office, development lab and
network space at two other locations throughout the United States under leases
expiring in 2008 through 2010; two U.S. network installations co-located in
tele-housing facilities under short-term leases; and sales offices in Chicago,
Los Angeles and San Francisco under leases expiring in 2007.
While we believe that these facilities meet our anticipated needs at least
through the end of 2007, we continually review our needs and may add facilities
in the future.
INTERNATIONAL
We lease approximately 11,000 square feet of office space in two locations in
England. One office located in London is the headquarters location for the
international division where the lease expires in June 2017, with cancellation
allowable, 5 years prior to expiration in 2012. The lease for the second
facility expires in 2008.
We lease approximately 6,000 square feet of office space in locations in France,
Hong Kong, India, South Korea and United Arab Emirates. The leases expire at
various dates through January 2008.
We also have tele-housing and co-location agreements under short-term leases for
our communications nodes around the world.
See the table of long-term contractual obligations and commitments contained in
Part II, Item 7, "Management's Discussion and Analysis of Financial Condition
and Results of Operations - Contractual Obligations" of this annual report for
information relating to our lease commitments.
ITEM 3 LEGAL PROCEEDINGS
From time to time we have been, and expect to continue to be, subject to legal
proceedings and claims in the ordinary course of business. These include claims
of alleged infringement of third-party patents, trademarks, copyrights, domain
names and other similar proprietary rights; employment claims; claims alleging
unsolicited commercial faxes sent on behalf of our customers; and contract
claims. These claims include claims that some of our services employ technology
covered by third party patents. These claims, even if not meritorious, could
require us to expend significant financial and managerial resources. No
assurance can be given as to the outcome of one or more claims of this nature.
If an infringement claim were determined in a manner adverse to us, we may be
required to discontinue use of any infringing technology, to pay damages and/or
to pay ongoing license fees that would increase our costs of providing service.
In connection with the termination of an agreement to sell the portal operations
of our discontinued India.com business, we brought suit against a broker that we
had engaged in connection with the proposed sale of the portal operations
alleging, among other things, breach of contract and misrepresentation. The
broker brought a counterclaim against us for a brokerage fee that would have
been payable on the closing of the proposed sale. The District Court entered a
judgment in the amount of $928,000 against us. On June 20, 2005, the Court of
Appeals reversed the District Court's ruling that the broker was a third party
beneficiary of the terminated agreement and set aside the $928,000 of damages
awarded against us by the District Court. The Court of Appeals, however, also
determined that the District Court had not fully resolved the issue of whether
we had breached the agreement to sell the portal operations for the express
purpose of avoiding
17
the broker's commission. Accordingly, the Court of Appeals remanded the case to
the District Court for further consideration. Upon consideration of the issue
remanded, the District Court issued a decision to enter judgment in our favor.
The broker filed a motion to amend that judgment and/or order a new trial. This
appeal was denied by the District Court. The broker has filed another appeal to
overturn the District Court's decision and the parties are awaiting the decision
of the appeal. No assurance can be given as to the likelihood of our success or
the ultimate liability, if any, in connection with this matter. We cannot assure
you that our ultimate liability, if any, in connection with the claim will not
have a material adverse effect on our business, financial condition or results
of operations.
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the fourth quarter of the fiscal year covered by this report, no matters
were submitted to a vote of security holders, through the solicitation of
proxies or otherwise.
ITEM 5 MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES
2006
-------------------------------------
FOURTH THIRD SECOND FIRST
MARKET PRICE QUARTER QUARTER QUARTER QUARTER
------------ ------- ------- ------- -------
High........ $4.25 $4.00 $4.45 $5.00
Low......... $2.45 $2.50 $2.95 $2.50
2005
-------------------------------------
FOURTH THIRD SECOND FIRST
MARKET PRICE QUARTER QUARTER QUARTER QUARTER
------------ ------- ------- ------- -------
High........ $5.00 $5.15 $6.75 $7.30
Low......... $3.10 $3.10 $4.15 $5.00
The Nasdaq closing market price at February 28, 2007 was $4.63.
DIVIDENDS
We have never declared or paid any cash dividends on our common stock and do not
anticipate paying any cash dividends on our stock in the foreseeable future. We
currently intend to retain future earnings, if any, to pay our obligations and
to finance the expansion of our business.
NUMBER OF SECURITY HOLDERS
At February 28, 2007, the approximate number of holders of record of Class A
common stock was 454, although there were many more beneficial owners.
STOCK LISTINGS
The principal market on which our common stock is traded is the Nasdaq Capital
Market under the symbol "EASY".
18
EQUITY COMPENSATION PLAN INFORMATION
The following table provides information as of December 31, 2006 with respect to
shares of our Class A common stock that may be issued under our existing equity
compensation plans.
YEAR ENDED DECEMBER 31, 2006
------------------------------------------------------------------
NUMBER OF REMAINING NUMBER OF
SECURITIES SECURITIES AVAILABLE
TO BE ISSUED WEIGHTED AVERAGE FOR FUTURE ISSUANCE
UPON EXERCISE EXERCISE PRICE UNDER EQUITY
OF OUTSTANDING OF OUTSTANDING COMPENSATION PLANS
OPTIONS, WARRANTS OPTIONS, WARRANTS (EXCLUDINGSECURITIES
PLAN CATEGORY AND RIGHTS (A) AND RIGHTS (B) REFLECTED IN COLUMN (A)(C)
------------- ----------------- ----------------- --------------------------
Equity compensation plans
approved by security holders (1) 1,004,370 $ 7.89 588,362
Equity compensation plans not
approved by security holders 89,905 $64.36 --
--------- ------ -------
Total: 1,094,275 $12.65 588,362
========= ====== =======
(1) Includes 124,852 unvested restricted stock award shares granted under the
2005 Stock and Incentive Plan.
(1) NON-SECURITY HOLDER-APPROVED EQUITY COMPENSATION PLANS
Each of the stock option plans listed in the table below were adopted or assumed
in connection with our acquisition of the entities after which the plan is
named. Except for the NetMoves 1996 Stock Option Plan, the plan terms and
conditions are substantially the same as the terms of our plans for which
shareholder approval was obtained, except that incentive stock options were not
issuable under these plans. Options under each plan were initially granted to
employees of the acquired entity who became our employees after the acquisition
or, in the case of the NetMoves 1996 Stock Option Plan, were assumed by us. The
plans are administered by a committee of our board of directors. The plans may
be amended by the board of directors. The number of shares underlying
outstanding options, the weighted average exercise price and the number of
shares underlying options available for future grant under each plan are
specified in the table below.
The Mail.com 1999 Supplemental Stock Option Plan and the Mail.com 2000
Supplemental Stock Option Plan provide for the grant of options to our
directors, employees and consultants and contain terms and conditions that are
substantially the same as the terms of our plans for which shareholder approval
was obtained, except that incentive stock options are not issuable under these
plans. The plans are administered by the compensation committee of our board of
directors. The plans may be amended by the board of directors. Under the plans,
options that expire unexercised may be re-granted by us to other employees. The
number of shares underlying outstanding options, the weighted average exercise
price and the number of shares underlying options available for future grant
under each of these plans are specified in the table below.
YEAR ENDED DECEMBER 31, 2006
----------------------------------------------------------------------------------
NUMBER OF SECURITIES
REMAINING AVAILABLE FOR
NUMBER OF SECURITIES TO BE WEIGHTED AVERAGE EXERCISE FUTURE ISSUANCE UNDER
ISSUED UPON EXERCISE OF PRICE OF OUTSTANDING EQUITY COMPENSATION PLANS
OUTSTANDING OPTIONS, OPTIONS, WARRANTS AND (EXCLUDING SECURITIES
WARRANTS AND RIGHTS RIGHTS REFLECTED IN COLUMN (A))
PLAN (A) (B) (C)
---- -------------------------- ------------------------- -------------------------
Plans Adopted in Acquisitions:
The Allegro Group Stock Option
Plan ........................... 209 $35.22 --
Lansoft Stock Option Plan ......... 30 $84.38 --
NetMoves 2000 Stock Option Plan ... 8,365 $83.92 --
NetMoves 1996 Stock Option Plan ... 8,796 $68.71 --
Other Plans:
Mail.com 1999 Supplemental Stock
Option Plan .................... 12,262 $20.14 --
19
Mail.com 2000 Supplemental Stock
Option Plan .................... 15,437 $27.76 --
The Company granted non-qualified options under individual stock option
agreements to the persons and on the terms indicated in the following table:
NAME GRANT DATE EXPIRATION DATE SHARES EXERCISE PRICE
---- ---------- --------------- ------ --------------
Gerald Gorman........ 2/1/97 2/1/07 400 $ 50.00
Frank Graziano....... 11/14/00 3/31/09 34 $ 84.38
Frank Graziano....... 11/14/00 2/28/09 68 $ 84.38
Gary Millin.......... 2/1/97 2/1/07 400 $ 50.00
Gary Millin.......... 2/1/97 2/1/07 2,000 $ 50.00
Thomas Murawski...... 1/26/01 1/26/11 34,000 $ 64.06
Charles Walden....... 2/16/98 2/16/08 7,904 $175.00
------
Total................ 44,806
======
RECENT SALES OF UNREGISTERED SECURITIES
During the three months ended December 31, 2006, we issued approximately 32,000
shares of Class A common stock to our 401(k) plan for employees' accounts at a
weighted average price of $3.39 per share representing our matching contribution
to the plan in reliance upon the exemption from registration pursuant to Section
4(2) of the Securities Act of 1933 or otherwise based on the inapplicability of
the registration requirements of the Securities Act of 1933.
ITEM 6 CONSOLIDATED SELECTED FINANCIAL DATA
The following consolidated selected financial data should be read in conjunction
with the consolidated financial statements and the notes to these statements and
Part II, Item 7, "Management's Discussion and Analysis of Financial Condition
and Results of Operations" elsewhere in this report. We believe that, due to
acquisitions and dispositions, goodwill and intangibles impairment charges and
debt restructuring gains that occurred during the period from 2002 through 2006,
the period to period comparisons for 2002 through 2006 are not meaningful and
should not be relied upon as indicative of future performance.
20
Five Year Summary of Selected Financial Data (in thousands, except per share,
share and employee data)
2006 2005 2004 2003 2002
------- ------- ------- -------- --------
Consolidated Statement of Operations Data for the
Year Ended December 31,
Revenues............................................ $74,025 $78,659 $91,840 $101,347 $114,354
Total cost of revenues and operating expenses (a)... 73,996 80,852 82,741 102,264 201,287
Income (loss) from operations....................... 29 (2,193) 9,099 (917) (86,933)
Total other income (expense), net (b)............... (1,055) 758 991 52,803 1,088
Income(loss) from continuing operations before
income taxes..................................... (1,026) (1,435) 10,090 51,886 (85,845)
Provision (credit) for income taxes................. (31) (350) 2,400 -- --
Income(loss) from continuing operations............. (995) (1,085) 7,690 51,886 (85,845)
Income (loss) from discontinued operations.......... 928 -- -- (938) --
Net income (loss)................................... (67) (1,085) 7,690 50,948 (85,845)
Basic net income(loss) per common share:
Income(loss) from continuing operations............. $ (0.10) $ (0.12) 0.87 $ 7.32 $ (25.65)
Income (loss) from discontinued operations.......... 0.09 -- -- (0.13) --
------- ------- ------- -------- --------
Basic net income (loss) per common share............ $ (0.01) $ (0.12) 0.87 $ 7.19 $ (25.65)
======= ======= ======= ======== ========
Diluted net income(loss) per common share:
Income(loss) from continuing operations............. $ (0.10) $ (0.12) $ 0.86 7.27 (25.65)
Income (loss) from discontinued operations.......... 0.09 -- -- (0.13) --
------- ------- ------- -------- --------
Diluted net income(loss) per common share........... $ (0.01) $ (0.12) $ 0.86 $ 7.14 $ (25.65)
======= ======= ======= ======== ========
Weighted average basic shares outstanding........... 10,362 8,937 8,801 7,081 3,347
Weighted average diluted shares outstanding......... 10,362 8,937 8,978 7,131 3,347
Consolidated Balance Sheet Data at December 31,
Cash and cash equivalents........................... $ 6,707 $ 6,282 $12,216 $ 6,623 $ 9,554
Total current assets................................ 19,943 20,351 28,963 19,813 23,511
Property and equipment, net......................... 9,703 10,252 8,071 10,641 14,833
Goodwill and other intangible assets, net........... 11,282 12,477 14,862 17,895 20,814
Total assets........................................ 41,233 43,975 52,664 49,411 61,011
Total current liabilities........................... 21,885 29,841 28,994 31,575 43,126
Capitalized interest on notes payable, less current
portion.......................................... -- -- -- 956 7,402
Long-term notes payable............................. -- -- 9,600 10,511 71,398
Total liabilities................................... 23,071 31,594 39,694 44,999 122,833
Total stockholders' equity (deficit)................ 18,162 12,381 12,970 4,412 (61,822)
Number of employees at December 31,................. 310 396 469 483 572
(a) Included in operating expenses are:
2006 2005 2004 2003 2002
------- ------- ------- -------- --------
Impairment of intangible assets..................... $ 550 $ -- $ 750 $ -- $ 78,784
Restructuring charges (credits)..................... 206 -- (350) 1,478 2,320
(Gain) loss on sale of businesses/Mailwatch service
line............................................. -- 250 (5,017) -- (426)
21
(b) Included in other income (expense), net are:
2006 2005 2004 2003 2002
------- ------- ------- -------- --------
Interest income..................................... $ 212 $ 136 $ 247 $ 36 $ 189
Interest expense.................................... (1,532) (1,420) (517) (1,390) (4,785)
Gain on domain names repurchase agreement........... -- 1,907 -- -- --
Gain on debt restructuring and settlements.......... -- -- 984 54,078 6,558
Impairment of investments........................... -- -- -- -- (1,515)
Other, net.......................................... 265 135 277 79 641
See Part II, Item 7, "Management's Discussion and Analysis of Financial
Condition and Results of Operations" of this annual report for a discussion of
factors that affect the comparability of the selected financial data in the
years presented above.
ITEM 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion and analysis of the financial condition and results of
operations should be read in conjunction with our consolidated financial
statements and the related notes included elsewhere in this annual report.
OVERVIEW
We are a provider of services that facilitate the electronic exchange of
information between enterprises, their trading communities and their customers.
On an average business day, we handle approximately one million transactions
that are integral to the movement of money, materials, products and people in
the global economy such as insurance claims, trade and travel confirmations,
purchase orders, invoices, shipping notices and funds transfers, among many
others. We offer a broad range of information exchange services to businesses
and service providers, including transaction management services and transaction
delivery services. Transaction management services consist of integrated desktop
messaging services and document capture and management services such as fax to
database, fax to data and data conversion services. Beginning in 2005, we
offered as a transaction management service an enhanced production messaging
service that we call EasyLink Production Messaging PM2.0 Service.
Transaction delivery services consist of electronic data interchange or "EDI,"
and basic production messaging services utilizing e-mail, fax and telex. As part
of our strategy, we will seek to upgrade customers who are using our basic
production messaging service to our enhanced production messaging service known
as EasyLink Production Messaging PM2.0 Service. See Part I, Item 1, "Business -
Company Overview" of this annual report. Until July 31, 2004, we also offered
MailWatch services to protect corporate e-mail systems, which included virus
protection, spam control and content filtering services.
On January 19, 2007, we announced that our board of directors had formed a
committee of independent directors to evaluate strategic alternatives for us,
which could include a potential business combination transaction. We hired
American Growth Capital as our financial advisor on December 22, 2006. As part
of this process, numerous parties have expressed interest in potentially
acquiring our business. We will continue to evaluate all strategic alternatives
to maximize value for our shareholders.
REVENUES
For the year ended December 31, 2006, total revenues were $74.0 million in
comparison to $78.7 million in 2005 and $91.8 million in 2004. As detailed in
the schedule below the declines in revenue in 2006 and 2005 as compared to the
prior years were largely attributable to (1) lower revenues in our production
messaging or "other" group of services in our transaction delivery services
amounting to $9.5 million or 21% in 2006 as compared to 2005 and $13.9 million
or 24% in 2005 as compared to 2004; and (2) $2.5 million in lower MailWatch
revenues in 2005 as a result of the sale of this service line as of July 31,
2004. These declines were partially offset by increased revenues in our
transaction management services of $4.9 million in 2006 representing 30% growth
over 2005 and $4.1 million in 2005 representing 33% growth in comparison to
2004. $1.0 million of the transaction management growth in 2006 was attributable
to revenue from the non-recurring license of software, accounting for 6% of the
30% growth for the year.
PERCENT CHANGE
-------------------
2006 VS. 2005 VS.
2006 2005 2004 2005 2004
------- ------- ------- -------- --------
Transaction Management Services..................... $21,230 $16,377 $12,304 30% 33%
Transaction Delivery Services EDI................... 18,111 18,142 19,004 --% (5)%
22
Transaction Delivery Services Other................. 34,684 44,140 58,059 (21)% (24)%
MailWatch........................................... -- -- 2,473 -- --
------- ------- ------- --- ---
$74,025 $78,659 $91,840 (6)% (14)%
Transaction delivery services have been continually impacted by pricing
pressures in the telecommunications market and by technological factors that
replace or reduce the deployment of these services by our customers. This has
led to lower volumes, negotiated individual customer price reductions at the
time of service contract renewals and the loss of certain customers. Although we
have focused efforts on stabilizing this revenue stream, we believe the trend
will continue throughout 2007. We will continue our efforts to expand our newer
transaction management services and to upgrade customers who are using our basic
production messaging services to our enhanced production messaging service,
EasyLink Production Messaging PM2.0 Service.
OPERATING RESULTS
In 2006 we had a loss from continuing operations of $1.0 million as compared to
$1.1 million in 2005. In 2006 we also had $0.9 million of income from
discontinued operations as a result of the reversal of a legal reserve reducing
the 2006 net loss to $67,000. However, our cash from operations increased to
$3.8 million in 2006 as compared to $0.3 million in 2005, which along with the
$5.4 million in proceeds from a private sale of our Class A common stock in
April 2006, helped us strengthen our financial position at December 31, 2006 in
comparison to the previous year. We believe that cost reduction measures,
particularly in sales and marketing, that we implemented throughout 2006 have
positioned us for improved operating results in 2007.
In 2006 we adopted Statement of Financial Accounting Standards No 123 (revised
2004), "Share-Based Payment" (SFAS 123(R)) which required that we record
compensation expense for all share-based payments. As a result, we recorded
$148,000 of stock based compensation expense related to unvested stock options
outstanding during the year. See Note 15, Stock Based Compensation, to the
consolidated financial statements included in this Form 10-K for additional
disclosure on the impact of this change in accounting.
CRITICAL ACCOUNTING POLICIES
In response to the Securities & Exchange Commission's Release No. 33-8040,
"Cautionary Advice Regarding Disclosure About Critical Accounting Policies," we
have identified the most critical accounting principles upon which our financial
reporting depends. Critical principles were determined by considering accounting
policies that involve the most complex or subjective decisions or assessments.
The most critical accounting policies were identified to be those related to
accounts receivable, long-lived assets and intangible assets, contingencies and
litigation, and restructurings.
ACCOUNTS RECEIVABLE
We perform ongoing credit evaluations of our customers and adjust credit limits
based upon payment history and the customer's current credit-worthiness, as
determined by a review of their current credit information. We continuously
monitor collections and payments from our customers and maintain a provision for
estimated credit losses based upon historical experience and any specific
customer collection issues that have been identified. While these credit losses
have historically been within our expectations and the provisions established,
we cannot guarantee that we will continue to experience the same credit loss
rates that have been experienced in the past.
IMPAIRMENT OF LONG-LIVED ASSETS
We assess goodwill and indefinite-lived intangibles for impairment annually
unless events occur that require more frequent reviews. Long-lived assets,
including amortizable intangibles, are tested for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset may not
be recoverable. Discounted cash flow analyses are used to assess
indefinite-lived intangible impairment, while undiscounted cash flow analyses
are used to assess long-lived asset impairment. If an assessment indicates
impairment, the impaired asset is written down to its fair market value based on
the best information available. Estimated fair market value is generally
measured with discounted estimated future cash flows. Considerable management
judgment is necessary to estimate undiscounted and discounted future cash flows.
Assumptions used for these cash flows are consistent with internal forecasts. On
an on-going basis, management reviews the value and period of amortization or
depreciation of long-lived assets, including goodwill and other intangible
assets. During this review, we reevaluate the significant assumptions used in
determining the original cost of long-lived assets. Although the assumptions may
vary from transaction to transaction, they generally include revenue growth,
operating results, cash flows and other indicators of value. Management then
determines whether there has been an impairment of the value of long-lived
assets based upon events or circumstances, which have occurred since
acquisition. The impairment policy is consistently applied in evaluating
impairment for each of the Company's wholly owned subsidiaries and investments.
CONTINGENCIES AND LITIGATION
We evaluate contingent liabilities including threatened or pending litigation in
accordance with SFAS No. 5, "Accounting for
23
Contingencies" and record accruals when the outcome of these matters is deemed
probable and the liability is reasonably estimable. We make these assessments
based on the facts and circumstances and in some instances based in part on the
advice of outside legal counsel.
RESTRUCTURING ACTIVITIES
Restructuring activities are accounted for in accordance with SFAS No. 146 and
relate to the consolidation of our US network facilities; the relocation and
consolidation of our New Jersey office facilities into one location; and a
similar consolidation of our office facilities in England. The restructuring
charges are comprised of abandonment costs with respect to leases, including the
write-off of leasehold improvements. We continually evaluate the amounts
established in the restructuring reserve. In 2004, mostly due to a settlement of
liability related to one of our abandoned locations, $350,000 of restructuring
charges was reversed.
RESULTS OF OPERATIONS - 2006, 2005 AND 2004
PERCENT CHANGE
-------------------
2006 VS. 2005 VS.
2006 2005 2004 2005 2004
------- ------- ------- -------- --------
Revenues .......................................................... $74,025 $78,659 $91,840 (5.9)% (14.4)%
Cost of revenues .................................................. 29,000 29,929 36,129 (3.1)% (17.2)%
------- ------- ------- ----- -----
Gross Margin ...................................................... 45,025 48,730 55,711 (7.6)% (12.5)%
% of Revenue ...................................................... 61% 62% 61%
Operating expenses:
Sales and marketing ............................................... 17,738 19,449 18,715 (8.8)% 3.9%
General and administrative ........................................ 19,274 20,076 23,368 (4.0)% (14.1)%
Product development ............................................... 6,947 6,768 6,730 2.6% 0.1%
Amortization of intangible assets ................................. 487 2,068 2,066 (76.5)% 0.0%
Impairment of intangible assets ................................... 550 -- 750 (a) (a)
Separation agreement costs ........................................ -- 2,312 -- (a) (a)
Loss (gain) on sale of businesses/MailWatch service line .......... -- 250 (5,017) (a) (a)
------- ------- -------
44,996 50,923 46,612 (11.6)% 9.2%
------- ------- -------
INCOME (LOSS) FROM OPERATIONS ..................................... 29 (2,193) 9,099
Other income (expense), net:
Interest income (expense), net .................................... (1,320) (1,284) (270)
Gain on domain names repurchase agreement ......................... -- 1,907 --
Gain on debt restructuring and settlements ........................ -- -- 984
Other ............................................................. 265 135 277
------- ------- -------
(1,055) 758 991
INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME TAXES ..... (1,026) (1,435) 10,090
Provision (credit) for income taxes ............................... (31) (350) 2,400
------- ------- -------
INCOME (LOSS) FROM CONTINUING OPERATIONS .......................... (995) (1,085) 7,690
======= ======= =======
(a) Represents one time charges (credits) that are not comparable from period
to period.
RESULTS OF OPERATIONS - 2006 AND 2005
REVENUES
Revenues in 2006 were $74.0 million as compared to $78.7 million in 2005. The
decrease of $4.7 million was due primarily to reduced revenues of $9.5 million
in our Transaction Delivery services, as a result of lower volumes and
negotiated individual customer price reductions, the loss of certain customers
and the sale of our fax businesses in Singapore and Malaysia. The reduced
revenues were partially offset by a $4.9 million increase, representing 30%
growth, in Transaction Management services. $1.0 million of the Transaction
Management growth was attributable to revenue from the non-recurring license of
software accounting for 6% of the 30% growth for the year. We
24
anticipate that revenues derived from our Transaction Delivery services will
continue to decline, while our Transaction Management services revenue is
expected to increase in 2007.
COST OF REVENUES
Cost of revenues for 2006 decreased by approximately $0.9 million but as a
percentage of revenues these costs increased to 39% in 2006 as compared to 38%
in 2005. The increase in cost of sales as a percentage of revenues is
attributable to (i) lower revenues in 2006 and (ii) additional costs incurred in
2006 in connection with our migration of operations to our new data center. In
2006 and 2005, we recorded credits of approximately $0.5 million to cost of
revenues. The 2006 credits relate to the favorable settlement of disputes with
certain telecom vendors and the anticipated refund of federal excise taxes
previously paid on telecom costs. In 2005 the credits relate to the settlement
with Verizon Business, formerly MCI ("MCI"), of our claims that we had paid
telecom charges to MCI in excess of contracted rates prior to MCI's bankruptcy
filing in 2002.
Cost of revenues consists primarily of costs incurred in the delivery and
support of our services, including depreciation of equipment used in our
computer systems, software license costs, tele-housing costs, the cost of
telecommunications services including local access charges, leased network
backbone circuit costs and long distance domestic and international termination
charges, and personnel costs associated with our systems and databases.
SALES AND MARKETING EXPENSES
Sales and marketing expenses for 2006 decreased to $17.7 million from $19.4
million in 2005. The lower costs relate to our international operations where we
made headcount reductions as part of a reorganization of the division. In the
United States where we are more focused on expanding Transaction Management
Services, spending was comparable from period to period. As a result of the cost
reduction measures taken in 2006, sales and marketing expenses are expected to
further decline in 2007.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses were $19.3 million in 2006 as compared to
$20.1 million in 2005. The lower cost results from a lower headcount largely in
our international operations as we reorganized our international management
group following the separation of the President of the international division in
February 2005. These expenses include all costs for our executive, finance and
accounting, customer billing and support, human resources and other headquarters
office functions. Legal and accounting fees, insurance and office rent are other
significant costs included in this category. While certain cost components may
vary, we expect general and administrative expenses in total for 2007 to be
comparable to 2006 amounts.
PRODUCT DEVELOPMENT EXPENSES
Product development costs, which consist primarily of personnel and consultants'
time and expense to research, conceptualize, and test product launches and
enhancements to our products, were $6.9 million for 2006 as compared to $6.8
million in 2005. We anticipate that spending for product development will
continue at the same levels in 2007 in connection with the development of the
new Transaction Management services and the continuing feature development of
other services.
AMORTIZATION AND IMPAIRMENT OF INTANGIBLE ASSETS
Amortization of intangible assets relates to intangible assets with finite
lives. The amortization is calculated on a straight line basis but decreased to
$0.5 million in 2006 as compared to $2.1 million in 2005 as certain assets were
fully amortized in the early part of 2006. In 2006 an impairment of our
trademark of $550,000 was recorded based upon the annual assessment of all
intangibles. The impairment was the result of lower anticipated revenues related
to our EasyLink trademark.
RESULTS OF OPERATIONS - 2005 AND 2004
REVENUES
Revenues in 2005 were $78.7 million as compared to $91.8 million in 2004. The
decrease of $13.1 million was due primarily to reduced revenues in our
Transaction Delivery services, as a result of lower volumes and negotiated
individual customer price reductions, the loss of certain customers, the sale of
our fax businesses in Singapore and Malaysia and $2.5 million in lower MailWatch
revenues as a result of the sale of this service line on July 31, 2004. The
reduced revenues were partially offset by a $4.1 million increase in Transaction
Management services.
25
COST OF REVENUES
Cost of revenues for 2005 decreased to $29.9 million from $36.1 million in 2004.
As a percentage of revenues these costs decreased to 38% in 2005 as compared to
39% in 2004. Cost of revenue reflects a decrease in costs as a result of lower
expenses in most of the cost components including lower depreciation charges,
savings from continuing cost reduction programs in network operations, lower
telecom rates, favorable dispute settlements including $540,000 or 1% of
revenues from the MCI settlement, reductions in telecom facilities and reduced
variable telecom charges consistent with reduced customer volumes.
Cost of revenues consists primarily of costs incurred in the delivery and
support of our services, including depreciation of equipment used in our
computer systems, software license costs, tele-housing costs, the cost of
telecommunications services including local access charges, leased network
backbone circuit costs and long distance domestic and international termination
charges, and personnel costs associated with our systems and databases.
SALES AND MARKETING EXPENSES
Sales and marketing expenses for 2005 increased to $19.4 million from $18.7
million in 2004. The increased expense relates to our increased staff and
promotional program spending to expand Transaction Management services.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses were $20.1 million in 2005 as compared to
$23.4 million in 2004. The reduced costs occurred in most categories of this
expense with the most significant reduction in officer and employee salaries and
related tax and benefit expenses amounting to approximately $1.5 million. Cost
reductions were generally achieved through reductions in head count.
PRODUCT DEVELOPMENT EXPENSES
Product development costs, which consist primarily of personnel and consultants'
time and expense to research, conceptualize, and test product launches and
enhancements to our products, were $6.8 million for 2005 as compared to $6.7
million in 2004.
AMORTIZATION AND IMPAIRMENT OF INTANGIBLE ASSETS
Amortization of intangible assets relates to intangible assets with finite
lives. The amortization is calculated on a straight line basis and, accordingly,
this expense was $2.1 million in both 2005 and 2004. In 2004 an impairment of
our trademark of $750,000 was recorded based upon the annual assessment of all
intangibles. We determined that there was no impairment of intangible assets for
2005.
INTEREST INCOME (EXPENSE), NET
Interest income(expense), net for 2005 was $1.3 million of expense as compared
to $270,000 of expense during 2004. The increase was primarily due to interest
on the Wells Fargo Term Loan obtained in December 2004. Interest on our
previously outstanding debt, paid off with the Wells Fargo loan proceeds, had
been capitalized in accordance with SFAS No. 15, "Accounting by Debtors and
Creditors for Troubled Debt Restructurings", and did not result in charges in
the statement of operations.
GAIN ON DEBT RESTRUCTURINGS AND SETTLEMENTS
In December 2004 we paid off all of the Company's previously existing secured
debt with part of the proceeds of the $12 million Term Loan from Wells Fargo. As
a result, we recorded a gain of $1.0 million from the reversal of interest
previously capitalized related to the retired debt
LIQUIDITY AND CAPITAL RESOURCES
In April 2006 we completed an equity financing of $5.4 million for the sale of
approximately 1.8 million shares of our Class A common stock. $3 million of the
proceeds were used to prepay a portion of our outstanding Term Loan with Wells
Fargo as required by our amended Credit Agreement and the balance of $2.4
million was for working capital purposes. The financing increased our cash and
cash equivalent position so that our cash balance at December 31, 2006 was $6.7
million in comparison to the December 31, 2005 balance of $6.3 million.
In July 2006 we entered into a new $6.0 million credit facility with CAPCO. The
facility provides for advances, subject to a maximum of 80% of certain of our
accounts receivable, that bear interest at the rate of 2% over the prime rate
of Greater Bay Bank. The facility has an
26
initial term of 24 months, but can be terminated by CAPCO after 12 months upon
90 days' prior written notice if we should fail to meet CAPCO's then existing
underwriting credit criteria. There are no financial covenants under the
facility. On July 27, 2006 we drew down an initial advance of $5.9 million and
used the proceeds to pay off the then outstanding loan balance with Wells Fargo,
along with other related fees and expenses. At December 31, 2006 advances
outstanding from CAPCO amounted to $4.4 million.
These financial developments along with the continuing implementation of cost
reduction measures instituted by management have significantly strengthened our
liquidity and financial position. Our working capital deficit decreased to $1.9
million as of December 31, 2006 in comparison to $9.5 million at December 31,
2005. We believe the completed equity financing and the new credit facility have
significantly improved our liquidity and, furthermore, we believe our current
cash and cash equivalent balances, the availability of funds under the new CAPCO
credit facility and cash from operations will provide adequate funds for
operating and other planned expenditures and debt service for at least the next
twelve months.
Cash provided from continuing operations amounted to $3.8 million in 2006 as
compared to $(109,000) for 2005. We spent $2.3 million for capital expenditures
in investing activities and the net impact of all financing activities for
2006, including those described above and the $9.6 million pay off of our
previous credit facility with Wells Fargo, amounted to a decrease in cash of
$0.9 million.
For the years ended December 31, 2005 and 2004 reports from our independent
registered public accountants contained an explanatory paragraph stating that we
had a working capital deficiency and an accumulated deficit among other factors
that raised substantial doubt about our ability to continue as a going concern.
CONTRACTUAL OBLIGATIONS
Below is a table that presents our contractual obligations and commitments at
December 31, 2006:
PAYMENTS DUE BY PERIOD (IN THOUSANDS)
-----------------------------------------------------
LESS THAN AFTER
TOTAL ONE YEAR 1-3 YEARS 4-5 YEARS 5 YEARS
------- --------- --------- --------- -------
Advances payable under credit facility ...... $ 4,413 $4,413 $ -- $ -- $ --
Operating and capital lease obligations ..... 13,929 2,777 6,866 3,658 628
Purchase obligations, including
telecommunication contract commitments ... 2,468 1,758 709 -- --
Other long term liabilities ................. 1,043 193 510 228 111
------- ------ ------ ------ ----
$21,853 $9,141 $8,085 $3,886 $739
======= ====== ====== ====== ====
We do not have any off-balance sheet arrangements that have or are reasonably
likely to have a current or future effect on our financial condition, changes in
financial position, revenues or expenses, results of operations, liquidity,
capital expenditures or capital resources that are material to investors.
RECENT ACCOUNTING PRONOUNCEMENTS
In December 2004, the Financial Accounting Standards Board ("FASB") issued SFAS
123 (revised 2004), "Share-Based Payment" (SFAS 123(R)) which replaces SFAS 123,
"Accounting for Stock-Based Compensation," and supersedes APB Opinion No. 25,
"Accounting for Stock Issued to Employees". Among other items, SFAS 123(R)
eliminates the use of APB 25 and the intrinsic method of accounting, and
requires all share-based payments, including grants of employee stock options,
to be recognized in the financial statements based on their fair values. SFAS
123(R) is effective for public companies beginning with the first annual period
that begins after June 15, 2005. Accordingly, the Company adopted SFAS 123(R) in
2006 and in accordance with its provisions recognized compensation expense for
all share-based payments and employee stock options based on the grant-date fair
value of those awards. To minimize the expense to be recorded in 2006 and future
periods, the Company accelerated the vesting of all current employee options
with an exercise price in excess of $4.60 per share in December, 2005. We
recorded $148,000 in compensation expense in 2006 in accordance with SFAS 123R.
In July 2006, the FASB issued FASB Interpretation No. 48, Accounting for
Uncertainty in Income Taxes, an Interpretation of FASB Statement No. 109 ("FIN
48"). FIN 48 provides recognition criteria and a related measurement model for
tax positions taken by companies. In accordance with FIN 48, a tax position is a
position in a previously filed tax return or a position expected to be taken in
a future tax filing that is reflected in measuring current or deferred income
tax assets and liabilities. Tax positions shall be recognized only when it is
more likely than not (likelihood of greater than 50%), based on technical
merits, that the position will be sustained upon examination. Tax positions that
meet the more likely than not threshold should be measured using a probability
weighted approach as the largest amount of tax benefit that is greater than 50%
likely of being realized upon settlement. FIN 48 is effective for fiscal years
27
beginning after December 15, 2006 and the Company will adopt FIN 48 as of
January 1, 2007. The Company is currently evaluating the provisions of FIN 48 to
determine the potential impact, if any, the adoption will have on the Company's
financial statements.
In September 2006, the FASB issued Statement of Financial Accounting Standards
("SFAS") No. 157, "Fair Value Measurements". SFAS No. 157 clarifies the
principle that fair value should be based on the assumptions market participants
would use when pricing an asset or liability and establishes a fair value
hierarchy that prioritizes the information used to develop those assumptions.
SFAS No. 157 requires fair value measurements to be separately disclosed by
level within the fair value hierarchy. SFAS No. 157 is effective for financial
statements issued for fiscal years beginning after November 15, 2007, and
interim periods within those fiscal years. The Company is currently evaluating
the impact of adopting SFAS No. 157 on its future results of operations and
financial condition on January 1, 2008.
In September 2006, the Securities and Exchange Commission issued Staff
Accounting Bulletin ("SAB") No. 108, "Considering the Effects of Prior Year
Misstatements When Quantifying Misstatements in Current Year Financial
Statements". SAB No. 108 provides interpretive guidance on the consideration of
the effects of prior year misstatements in quantifying current year
misstatements for the purpose of assessing materiality. SAB No. 108 is effective
for fiscal years ending after November 15, 2006. The Company adopted SAB No. 108
in the fourth quarter of 2006 with no impact on its results of operations or
financial condition.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to market risk, primarily from changes in interest rates, foreign
exchange rates and credit risk. We maintain continuing operations in Europe
(mostly in the United Kingdom) and, to a lesser extent, in Brazil, India,
Malaysia and Singapore. Fluctuations in exchange rates may have an adverse
effect on our results of operations and could also result in exchange losses.
The impact of future rate fluctuations cannot be predicted adequately. To date
we have not sought to hedge the risks associated with fluctuations in exchange
rates.
Market Risk - Our accounts receivable are subject, in the normal course of
business, to collection risks. We regularly assess these risks and have
established policies and business practices to protect against the adverse
effects of collection risks. As a result we do not anticipate any material
losses in this area.
Interest Rate Risk - Interest rate risk refers to fluctuations in the value of a
security resulting from changes in the general level of interest rates.
Investments that are classified as cash and cash equivalents have original
maturities of three months or less. Changes in the market's interest rates do
not affect the value of these investments. Our CAPCO credit facility creates an
interest rate risk for us on all outstanding advances. The impact of this risk
assuming the current debt balance remains outstanding and assuming a
hypothetical shift of 1% in interest rates would be an increase or decrease, as
applicable, in annual interest costs of $43,000. We have considered the use of
interest rate swaps and similar transactions to minimize this risk but have not
entered into any such arrangements to date. We intend to continue to evaluate
this risk and the cost and possible implementation of such arrangements in the
future.
28
ITEM 8 CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
EASYLINK SERVICES CORPORATION
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
----
Reports of Independent Registered Public Accounting Firms................ 30
Consolidated Balance Sheets as of December 31, 2006 and 2005............. 32
Consolidated Statements of Operations for the years ended
December 31, 2006, 2005 and 2004...................................... 33
Consolidated Statements of Stockholders' Equity and Comprehensive
Income (Loss) for the years ended December 31, 2006, 2005 and 2004.... 34
Consolidated Statements of Cash Flows for the years ended
December 31, 2006, 2005 and 2004...................................... 36
Notes to Consolidated Financial Statements............................... 38
29
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders of
EasyLink Services Corporation:
We have audited the accompanying consolidated balance sheets of EasyLink
Services Corporation and subsidiaries as of December 31, 2006 and 2005, and the
related consolidated statements of operations, stockholders' equity and
comprehensive income (loss), and cash flows for each of the two years in the
period ended December 31, 2006. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the auditing standards of the Public
Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. The Company is not
required to have, nor were we engaged to perform an audit of its internal
control over financial reporting. Our audit included consideration of internal
control over financial reporting as a basis for designing audit procedures that
are appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company's internal control over financial
reporting. Accordingly, we express no such opinion. An audit includes examining,
on a test basis, evidence supporting the amounts and disclosures in the
financial statements, assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of EasyLink Services
Corporation and subsidiaries as of December 31, 2006 and 2005, and the results
of their operations and their cash flows for each of the two years in the period
ended December 31, 2006, in conformity with accounting principles generally
accepted in the United States of America.
/s/ Grant Thornton LLP
----------------------------------------
Edison, New Jersey
March 27, 2007
30
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors
EasyLink Services Corporation:
We have audited the accompanying consolidated statements of operations,
stockholders' equity and comprehensive income (loss), and cash flows of EasyLink
Services Corporation and Subsidiaries for the year ended December 31, 2004.
These consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audit.
We conducted our audit in accordance with the auditing standards of the Public
Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, EasyLink Services Corporation and subsidiaries
results of operations and cash flows for the year ended December 31, 2004 in
conformity with U.S. generally accepted accounting principles.
As discussed in Note 21, the consolidated financial statements for the year
ended December 31, 2004 have been restated.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. The Company has a working
capital deficiency and an accumulated deficit that raise substantial doubt about
its ability to continue as a going concern. The consolidated financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.
/s/ KPMG LLP
----------------------------------------
New York, New York
April 11, 2005, except as to Note 21, which is as of December 5, 2005.
31
EASYLINK SERVICES CORPORATION
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
DECEMBER 31,
---------------------
2006 2005
--------- ---------
ASSETS
Current assets:
Cash and cash equivalents ............................. $ 6,707 $ 6,282
Accounts receivable, net of allowance for doubtful
accounts of $1,605 and $2,330 as of
December 31, 2006 and 2005, respectively ........... 10,725 11,416
Prepaid expenses and other current assets ............. 2,511 2,653
--------- ---------
Total current assets .................................. 19,943 20,351
--------- ---------
Property and equipment, net ........................... 9,703 10,252
Goodwill, net ......................................... 6,213 6,213
Other intangible assets, net .......................... 5,069 6,264
Other assets .......................................... 305 895
--------- ---------
Total assets .......................................... $ 41,233 $ 43,975
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ...................................... $ 5,810 $ 6,464
Accrued expenses ...................................... 10,299 10,432
Loans and notes payable ............................... 4,413 10,550
Other current liabilities ............................. 1,363 1,467
Net liabilities of discontinued operations ............ -- 928
--------- ---------
Total current liabilities ............................. 21,885 29,841
Long term liabilities ................................. 1,186 1,753
--------- ---------
Total liabilities ..................................... 23,071 31,594
--------- ---------
Stockholders' equity:
Common stock, $0.01 par value; 510,000,000 shares
authorized at December 31, 2006 and 2005:
Class A--500,000,000 shares authorized at
December 31, 2006 and 2005, 10,967,648 and
9,045,026 shares issued and outstanding at
December 31, 2006 and 2005, respectively ........... 110 90
Additional paid-in capital ............................ 560,690 554,699
Accumulated other comprehensive loss .................. (833) (670)
Accumulated deficit ................................... (541,805) (541,738)
--------- ---------
Total stockholders' equity ............................ 18,162 12,381
--------- ---------
Commitments and contingencies
Total liabilities and stockholders' equity ............ $ 41,233 $ 43,975
========= =========
See accompanying notes to consolidated financial statements.
32
EASYLINK SERVICES CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except share and per share data)
YEAR ENDED DECEMBER 31,
-------------------------------------
2006 2005 2004
----------- ---------- ----------
Revenues ...................................................... $ 74,025 $ 78,659 $ 91,840
Cost of revenues .............................................. 29,000 29,929 36,129
----------- ---------- ----------
Gross profit .................................................. 45,025 48,730 55,711
----------- ---------- ----------
Operating expenses:
Sales and marketing ........................................... 17,738 19,449 18,715
General and administrative .................................... 19,274 20,076 23,368
Product development ........................................... 6,947 6,768 6,730
Amortization of intangible assets ............................. 487 2,068 2,066
Impairment of intangible assets ............................... 550 -- 750
Separation agreement costs .................................... -- 2,312 --
(Gain) loss on sale of businesses ............................. -- 250 (5,017)
----------- ---------- ----------
44,996 50,923 46,612
----------- ---------- ----------
Income (loss) from operations ................................. 29 (2,193) 9,099
----------- ---------- ----------
Other income (expense):
Interest income ............................................... 212 136 247
Interest expense .............................................. (1,532) (1,420) (517)
Gain on domain names repurchase agreement ..................... -- 1,907 --
Gain on debt restructuring and settlements .................... -- -- 984
Other, net .................................................... 265 135 277
----------- ---------- ----------
Total other income (expense), net ............................. (1,055) 758 991
----------- ---------- ----------
Income (loss) from continuing operations before income taxes .. (1,026) (1,435) 10,090
Provision (credit) for income taxes ........................... (31) (350) 2,400
----------- ---------- ----------
Income (loss) from continuing operations ...................... (995) (1,085) 7,690
----------- ---------- ----------
Income from discontinued operations ........................... 928 -- --
----------- ---------- ----------
Net income (loss) ............................................. $ (67) $ (1,085) $ 7,690
=========== ========== ==========
Basic net income (loss) per share:
Income (loss) from continuing operations ...................... $ (0.10) $ (0.12) $ 0.87
Income from discontinued operations ........................... 0.09 -- --
----------- ---------- ----------
Basic net income (loss) per share ............................. $ (0.01) $ (0.12) $ 0.87
=========== ========== ==========
Diluted net income (loss) per share:
Income (loss) from continuing operations ...................... $ (0.10) $ (0.12) $ 0.86
Income from discontinued operations ........................... 0.09 -- --
----------- ---------- ----------
Diluted net income (loss) per share ........................... $ (0.01) $ (0.12) $ 0.86
=========== ========== ==========
Weighted-average basic shares outstanding ..................... 10,361,936 8,937,475 8,800,854
=========== ========== ==========
Weighted-average diluted shares outstanding ................... 10,361,936 8,937,475 8,978,208
=========== ========== ==========
See accompanying notes to consolidated financial statements.
33
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME (LOSS)
(in thousands, except share data)
CLASS A COMMON CLASS B COMMON
STOCK STOCK ADDITIONAL
------------------- ----------------- PAID-IN
SHARES AMOUNT SHARES AMOUNT CAPITAL
---------- ------ -------- ------ ----------
Balance at December 31, 2003 ................................. 8,564,300 $ 85 200,000 $ 2 $552,940
========== ==== ======== === ========
Net income ................................................... -- -- -- -- --
Unrealized holding gains on marketable securities ............ -- -- -- -- --
Cumulative foreign currency translation ...................... -- -- -- -- --
Comprehensive income ......................................... -- -- -- -- --
Issuance of Class A common stock in connection with
401(k) plan ............................................... 54,626 1 -- -- 399
Issuance of Class A common stock in connection
with employee terminations ................................ -- -- -- -- 150
Issuance of Class A common stock in lieu of cash
in lieu of cash interest on debt .......................... 7,106 -- -- -- 48
Proceeds from the exercise of stock options .................. 8,860 -- -- -- 32
Conversion of Class B common stock to Class A Common
stock ..................................................... 200,000 2 (200,000) (2) --
Other ........................................................ -- -- -- -- 204
---------- ---- -------- --- --------
Balance at December 31, 2004 ................................. 8,834,892 $ 88 -- $-- $553,773
========== ==== ======== === ========
Net income (loss) ............................................ -- -- -- -- --
Unrealized holding gains on marketable securities ............ -- -- -- -- --
Cumulative foreign currency translation ...................... -- -- -- -- --
Comprehensive income (loss) .................................. -- -- -- -- --
Issuance of Class A common stock in connection with
401(k) plan ............................................... 99,923 1 -- -- 474
Proceeds from the exercise of stock options .................. 26,350 0 -- -- 96
Issuance of Class A common stock in connection with
Quickstream acquisition ................................... 83,861 1 -- -- 356
---------- ---- -------- --- --------
Balance at December 31, 2005 ................................. 9,045,026 $ 90 -- $-- $554,699
========== ==== ======== === ========
Net income (loss) ............................................ -- -- -- -- --
Unrealized holding gains on marketable securities ............ -- -- -- -- --
Cumulative foreign currency translation ...................... -- -- -- -- --
Comprehensive income (loss) .................................. -- -- -- -- --
Issuance of Class A common stock in connection with
401(k) plan ............................................... 125,400 2 -- -- 423
Proceeds from the exercise of stock options .................. 3,862 0 -- -- 11
Issuance of Class A common stock in connection with private
placement ................................................. 1,793,360 18 -- -- 5,379
Stock based compensation expense ............................. 178
---------- ---- -------- --- --------
Balance at December 31, 2006 ................................. 10,967,648 $110 -- $-- $560,690
========== ==== ======== === ========
See accompanying notes to consolidated financial statements.
34
ACCUMULATED
OTHER TOTAL
COMPREHENSIVE ACCUMULATED STOCKHOLDERS'
LOSS DEFICIT EQUITY
------------- ----------- --------------
Balance at December 31, 2003 ................................ $(272) $(548,343) $ 4,412
===== ========= =======
Net income .................................................. -- 7,690 7,690
Unrealized holding gains on marketable securities ........... 529 -- 529
Cumulative foreign currency translation ..................... (495) -- (495)
----- --------- -------
Comprehensive income ........................................ 34 7,690 7,724
----- --------- -------
Issuance of Class A common stock in connection with
401(k) plan .............................................. -- -- 400
Issuance of Class A common stock in connection with
employee termination ..................................... -- -- 150
Issuance of Class A common stock in lieu of cash interest
on debt .................................................. -- -- 48
Proceeds from the exercise of stock options ................. -- -- 32
Other ....................................................... -- -- 204
----- --------- -------
Balance at December 31, 2004 ................................ $(238) $(540,653) $12,970
===== ========= =======
Net income (loss) ........................................... -- (1,085) (1,085)
Unrealized holding gains on marketable securities ........... (529) -- (529)
Cumulative foreign currency translation ..................... 97 -- 97
----- --------- -------
Comprehensive income (loss) ................................. (432) (1,085) (1,517)
----- --------- -------
Issuance of Class A common stock in connection with
401(k) plan .............................................. -- -- 475
Proceeds from the exercise of stock options ................. -- -- 96
Issuance of Class A common stock in connection with
Quickstream acquisition ..................................... -- -- 357
Other ....................................................... -- --
----- --------- -------
Balance at December 31, 2005 ................................ $(670) $(541,738) $12,381
===== ========= =======
Net income (loss) ........................................... -- (67) (67)
Unrealized holding gains on marketable securities ........... -- -- --
Cumulative foreign currency translation ..................... (163) -- (163)
----- --------- -------
Comprehensive income (loss) ................................. (163) (67) (230)
----- --------- -------
Issuance of Class A common stock in connection with
401(k) plan .............................................. -- -- 425
Proceeds from the exercise of stock options ................. -- -- 11
Issuance of Class A common stock in connection with
private placement ........................................... -- -- 5,397
Stock based compensation expense ............................ -- -- 178
----- --------- -------
Balance at December 31, 2006 ................................ $(833) $(541,805) $18,162
===== ========= =======
See accompanying notes to consolidated financial statements.
35
EASYLINK SERVICES CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
YEAR ENDED DECEMBER 31,
-----------------------------
2006 2005 2004
-------- ------- --------
Cash flows from operating activities:
Net income (loss) .................................................................... $ (67) $(1,085) $ 7,690
Adjustments to reconcile net income (loss) to net cash provided by
(used in) operating activities:
Income from discontinued operations .................................................. (928) -- --
Depreciation ......................................................................... 2,987 3,382 5,259
Amortization of other intangible assets .............................................. 487 2,068 2,066
Provision for restructuring charges (credits) ........................................ 206 -- (350)
Gain on debt restructuring and settlements ........................................... -- -- (984)
Issuance of shares as matching contributions to employee benefit plans ............... 425 475 400
Debt termination fee and amortization of debt issuance costs ......................... 634 -- --
Stock based compensation ............................................................. 178 -- --
Other non-cash charges (credits) ..................................................... (168) 94 672
Separation agreement costs ........................................................... -- 2,312 --
(Gain) on sale of domain names repurchase rights ..................................... -- (1,907) --
(Gain) loss on sale of businesses/Mailwatch service line ............................. -- 250 (5,017)
Loss on sale of marketable securities ................................................ -- 469 --
Impairments of intangibles ........................................................... 550 -- 750
Changes in operating assets and liabilities:
Marketable securities ............................................................. -- -- (1,502)
Accounts receivable, net .......................................................... 854 408 1,416
Prepaid expenses and other current assets ......................................... (128) 1,086 290
Other assets ...................................................................... 372 (127) 265
Accounts payable, accrued expenses and other liabilities .......................... (1,607) (7,534) (5,001)
-------- ------- --------
Net cash provided by (used in) operating activities of continuing operations ......... 3,795 (109) 5,954
Net cash provided by (used in) operating activities of discontinued operations ....... -- 400 (300)
-------- ------- --------
Net cash provided by operating activities ............................................ 3,795 291 5,654
Cash flows from investing activities:
Purchases of property and equipment, including capitalized software .................. (2,271) (4,596) (2,564)
Proceeds from sale of businesses/Mailwatch service line .............................. -- -- 3,500
Proceeds from sale of assets/domain names repurchase rights .......................... 92 830 1,000
Proceeds from sale of marketable securities .......................................... -- 1,021 --
Cash paid for Quickstream acquisition ................................................ -- (342) --
-------- ------- --------
Net cash provided by (used in) investing activities .................................. (2,179) (3,087) 1,936
-------- ------- --------
Cash flows from financing activities:
Proceeds of bank loan advances ....................................................... 23,264 1,900 --
Payment of bank loan advances ........................................................ (19,801) (950) --
Net proceeds from issuance of Class A common stock ................................... 5,397 -- --
Net proceeds from issuance of Class A common stock upon exercise
of employee stock options ......................................................... 11 96 32
Proceeds received for notes receivable ............................................... 500 -- --
Payments under capital lease obligations ............................................. (56) (330) (472)
Proceeds from notes payable .......................................................... -- -- 12,000
Principal payments of notes payable .................................................. (9,600) (3,825) (12,053)
Debt termination fee and deferred debt issuance costs ................................ (645) -- --
Interest payments on restructured notes and capitalized interest ..................... -- -- (1,009)
-------- ------- --------
Net cash used in financing activities ................................................ (930) (3,109) (1,502)
-------- ------- --------
Effect of foreign exchange rate changes on cash and cash equivalents ................. (261) (29) (495)
-------- ------- --------
Net increase (decrease) in cash and cash equivalents ................................. 425 (5,934) 5,593
-------- ------- --------
Cash and cash equivalents at beginning of the year ................................... 6,282 12,216 6,623
-------- ------- --------
Cash and cash equivalents at the end of the year ..................................... $ 6,707 $ 6,282 $ 12,216
-------- ------- --------
Supplemental disclosures of cash flow information:
Cash paid for interest ............................................................... $ 748 $ 1,208 $ 497
Cash paid for taxes .................................................................. $ 136 $ 415 $ 173
Purchases of property, plant and equipment through capital lease obligations ......... $ -- $ 91 649
See accompanying notes to consolidated financial statements.
36
Supplemental Disclosure of Non-Cash Information:
The Company issued 425,000 shares of Class A common stock in August, 2005 in
connection with the acquisition of Quickstream Software, Inc.
The Company issued 35,530 shares of Class A common stock valued at approximately
$48,000 as payment of interest in lieu of cash for the year ended December 31,
2004.
37
EASYLINK SERVICES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2006 AND 2005
(1) SUMMARY OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES
(A) SUMMARY OF OPERATIONS
The Company offers a broad range of information exchange services to businesses
and service providers, including Transaction Management Services consisting of
integrated desktop messaging services and document capture and management
services such as fax to database, fax to data and data conversion services;
Transaction Delivery Services consisting of electronic data interchange or
"EDI," and production messaging services utilizing e-mail, fax and telex; and
through July 31, 2004, services that protect corporate e-mail systems such as
virus protection, spam control and content filtering services (the MailWatch
service line).
The Company operates in a single industry segment, business communication
services. Although the Company provides various major service offerings, many
customers employ multiple services using the same access and network facilities.
Similarly, network operations and customer support services are provided across
various services. Accordingly, allocation of expenses and reporting of operating
results by individual services would be impractical and arbitrary. Services are
provided in the United States and certain other regions in the world
(predominantly in the United Kingdom).
(B) LIQUIDITY, GOING CONCERN AND MANAGEMENT'S PLAN
For the years ended December 31, 2005 and 2004 reports from the Company's
independent registered public accountants contained an explanatory paragraph
stating that the Company had a working capital deficiency and an accumulated
deficit among other factors that raised substantial doubt about its ability to
continue as a going concern. During 2006 the Company completed an equity
financing for $5.4 million and entered into a new $6.0 million credit facility
with CAPCO that is subject to a maximum of 80% of certain accounts receivable of
the Company but with no financial covenants. These financial developments along
with the continuing implementation of cost reduction measures instituted by
management have strengthened the Company's liquidity and financial position.
Debt balances were reduced to $4.4 million at December 31, 2006 from $10.6
million at December 31, 2005 which will reduce future interest payments.
The Company does not expect to repay the total $4.4 million debt balance in
2007, but it is classified as a current liability in accordance with generally
accepted accounting principles as the facility is subject to a credit review by
CAPCO during 2007. In addition, the Company's working capital deficit decreased
to $1.9 million as of December 31, 2006 in comparison to $9.5 million at
December 31, 2005.
(C) PRINCIPLES OF CONSOLIDATION AND BASIS OF PRESENTATION
The consolidated financial statements include the accounts of the Company and
its wholly-owned or majority-owned subsidiaries from the respective dates of
acquisition. All significant intercompany accounts and transactions have been
eliminated in consolidation. All other investments that the Company does not
have the ability to control or exercise significant influence over are accounted
for under the cost method.
Effective August 28, 2006, the Company authorized and implemented a 1-for-5
reverse stock split of all issued and outstanding Class A common stock.
Accordingly all issued and outstanding share and per share amounts in the
accompanying consolidated financial statements have been retroactively restated
to reflect the reverse stock split.
(D) USE OF ESTIMATES
The preparation of financial statements in accordance with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities, the disclosure of contingent assets and liabilities and the
reported amounts of revenues and expenses. These estimates and assumptions
primarily relate to the estimates of collectibility of accounts receivable, the
realization of goodwill and other intangibles, and certain accrual estimates.
Actual results could differ from those estimates.
(E) CASH AND CASH EQUIVALENTS
The Company considers all highly liquid securities, with maturities of three
months or less when acquired, to be cash equivalents.
(F) ACCOUNTS RECEIVABLE AND ALLOWANCE FOR DOUBTFUL ACCOUNTS
Accounts receivable represent trade receivables billed to customers in arrears
on a monthly basis. Receivables are recorded in the period
38
the related revenues are earned and, generally, are collected within a short
time period. The Company does not require collateral from its customers and any
balances over 30 days old are considered past due.
The allowance for doubtful accounts is based upon the Company's assessment of
the collectibility of customer accounts receivable. The Company regularly
reviews the allowance by considering factors such as historical experience,
credit quality, the age of accounts receivable balances and current economic
conditions that may affect a customer's ability to pay.
(G) PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Expenditures for additions and
improvements are capitalized. The cost of repairs and maintenance, including the
cost of replacing minor items that do not constitute a substantial betterment,
are charged to operations as incurred. Depreciation is calculated using the
straight-line method over the estimated useful lives of the related assets,
generally ranging from three to five years. Property and equipment under capital
leases are stated at the present value of minimum lease payments and are
amortized using the straight-line method over the shorter of the lease term or
the estimated useful lives of the assets. Leasehold improvements are amortized
using the straight-line method over the estimated useful lives of the assets or
the term of the lease, whichever is shorter.
(H) ACCOUNTING FOR IMPAIRMENT OF LONG-LIVED AND INTANGIBLE ASSETS
The Company assesses goodwill and indefinite-lived intangible assets for
impairment annually unless events occur that require more frequent reviews.
Long-lived assets, including amortizable intangibles, are tested for impairment
whenever events or changes in circumstances indicate that the carrying amount of
an asset may not be recoverable. Discounted cash flow analyses are used to
assess indefinite-lived intangible asset impairment while undiscounted cash flow
analyses are used to assess finite lived intangibles and other long-lived asset
impairment. If an assessment indicates impairment, the impaired asset is written
down to its fair market value based on the best information available. Estimated
fair market value is generally measured with discounted estimated future cash
flows. Considerable management judgment is necessary to estimate undiscounted
and discounted future cash flows. Assumptions used for these cash flows are
consistent with internal forecasts. On an ongoing basis, management reviews the
value and period of amortization or depreciation of long-lived assets, including
other intangible assets. During this review, the significant assumptions used in
determining the original cost of long-lived assets are reevaluated. Although the
assumptions may vary from transaction to transaction, they generally include
revenue growth, operating results, cash flows and other indicators of value.
Management then determines whether there has been an impairment of the value of
long-lived assets based upon events or circumstances, which have occurred since
acquisition. The impairment policy is consistently applied in evaluating
impairment for each of the Company's wholly owned subsidiaries and investments.
(I) GOODWILL AND INTANGIBLE ASSETS
Intangible assets include goodwill, trademark, customer lists, technology and
other intangibles. Goodwill represents the excess of the purchase price of
acquired businesses over the estimated fair value of the tangible and
identifiable intangible net assets acquired. Trademark was determined to have an
indefinite life and therefore is not amortized. Customer lists are being
amortized on a straight-line basis over ten years. Technology is being amortized
on a straight-line basis over its estimated useful lives which range from three
to five years.
(J) INCOME TAXES
Income taxes are accounted for under the asset and liability method. Under this
method, deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
basis and operating loss and tax credit carryforwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in results of operations in the period that
the tax change occurs. Valuation allowances are established to the extent it is
anticipated that it is more likely than not that the deferred tax assets will
not be realized.
(K) REVENUE RECOGNITION
The Company's business communication services include Transaction Management
Services consisting of integrated desktop messaging services and document
capture and management services such as fax to database, fax to data and data
conversion; Transaction Delivery Services consisting of electronic data
interchange or "EDI" and production messaging services utilizing e-mail, fax and
telex; and, through July 31, 2004, services that help protect corporate e-mail
systems such as virus protection, spam control and content filtering services
(the MailWatch service line). The Company derives revenues from monthly fees and
usage-based charges for all its services and from license fees for integrated
desktop messaging. Revenues for services are recognized as performed. License
revenue is recognized over the average estimated customer life of 3 years. The
Company also derives revenues from set up or development fees which are
recognized over the
39
period of the contract beginning when the account is put in service.
During the twelve months ended December 31, 2006 the Company recorded revenue
related to the sale, including training and support services of a license to the
source code of its Quickstream software. The revenue related to this transaction
has been recognized over the contractual customer support period of four months
in accordance with the provisions of the AICPA Statement of Position (SOP) 97-2
(Software Revenue Recognition). The total revenue recognized amounted to
$990,000.
Certain of the Company's services are subject to sales taxes in certain states
and local jurisdictions. For those jurisdictions that the Company believes its
services are subject to tax, it assesses the tax on its customers and remits
amounts collected to the government entities. The tax charges are not reported
in the Company's revenues.
(L) PRODUCT DEVELOPMENT COSTS
Product development costs consist primarily of personnel and consultants' time
and expense to research, conceptualize, and test product launches and
enhancements to each of the Company's services. Such costs are expensed as
incurred.
(M) SALES AND MARKETING COSTS
The primary component of sales and marketing expenses are salaries and
commissions for sales, marketing, and business development personnel. These
expenses also include the cost of advertising and promoting the Company's
services which are recorded as incurred and amounted to $799,000, $525,000 and
$256,000 for the years ended December 31, 2006, 2005 and 2004, respectively.
(N) FINANCIAL INSTRUMENTS AND CONCENTRATION OF CREDIT RISK
Financial instruments that potentially subject the Company to significant
concentrations of credit risk consist of cash, cash equivalents, accounts
receivable and loans and notes payable. At December 31, 2006 and 2005, the fair
value of cash, cash equivalents and accounts receivable approximated their
financial statement carrying amount because of the short-term maturity of these
instruments. Loans and notes payable are subject to interest rate fluctuations
based on movements in the prime rate. Accordingly, the recorded values of loans
and notes payable approximate their fair values, as interest approximates market
rates.
The Company holds cash and cash equivalents at several major financial
institutions in amounts which often exceed FDIC insured limits. The Company
also has $2.6 million in foreign bank accounts that are not insured. The Company
has not experienced any losses due to such concentration of credit risk.
Credit is extended to customers based on the evaluation of their financial
condition and collateral is not required. The Company performs ongoing credit
assessments of its customers and maintains an allowance for doubtful accounts.
No single customer exceeded 10% of either total revenues or accounts receivable
in 2006, 2005, or 2004. Revenues from the Company's five largest customers
amounted to $9.4 million, $9.8 million and $9.5 million aggregating to 13%, 11%,
and 10% of the Company's total revenues in 2006, 2005, and 2004 respectively.
(O) STOCK-BASED COMPENSATION PLANS
In the first quarter of 2006, the Company adopted the provisions of, and
accounts for stock-based compensation, in accordance with FASB Statement of
Financial Accounting Standards No. 123-revised 2004 ("SFAS123R"), "Share-Based
Payment" which replaces SFAS 123, "Accounting for Stock-Based Compensation," and
supersedes APB Opinion No. 25, "Accounting for Stock Issued to Employees". Under
the fair value recognition provisions of FAS123R, stock-based compensation is
measured at the grant date based on the fair value of the award and is
recognized as expense on a straight line basis over the requisite service
period, which is the vesting period. To minimize the expense to be recorded in
2006 and future periods, the Company accelerated the vesting of all employee
options with an exercise price in excess of $4.60 per share in December, 2005.
See Note 15 for further information regarding our stock-based compensation
assumptions and expenses, including pro-forma disclosures for prior periods as
if we had recorded stock-based compensation expense.
(P) BASIC AND DILUTED NET INCOME (LOSS) PER SHARE
Net income (loss) per share is presented in accordance with the provisions of
SFAS No. 128, "Earnings Per Share", and the Securities and Exchange Commission
Staff Accounting Bulletin No. 98. Under SFAS No. 128, basic Earnings per Share
("EPS") excludes dilution for common stock equivalents and is computed by
dividing income or loss available to common shareholders by the weighted average
number of common shares outstanding for the period. Diluted EPS reflects the
potential dilution that could occur if securities or other contracts to issue
common stock were exercised or converted into common stock and resulted in the
issuance of common stock.
Diluted net loss per share is equal to basic loss per share for the year ended
December 31, 2006 and 2005, since all common stock equivalents are anti-dilutive
for this period. Diluted net income per common share for the year ended December
31, 2004 includes the
40
effect of employee options to purchase 177,353 shares of common stock. Diluted
net income (loss) per common share for the year ended December 31, 2004, does
not include the effects of employee options to purchase 304,817 shares of common
stock and 159,705 common stock warrants as their inclusion would be
anti-dilutive.
(Q) COMPUTER SOFTWARE
Capitalized computer software is recorded in accordance with the American
Institute of Certified Public Accountants Statement of Position ("SOP") 98-1,
"Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use" and is depreciated using the straight-line method over the
estimated useful life of the software, generally 3 years. SOP 98-1 provides
guidance for determining whether computer software is internal-use software and
guidance on accounting for the proceeds of computer software originally
developed or obtained for internal use and then subsequently sold to the public.
It also provides guidance on capitalization of the costs incurred for computer
software developed or obtained for internal use.
The cost of computer software capitalized as of December 31, 2006 and 2005
amounted to $5.8 million and $5.9 million respectively and related depreciation
expense amounted to $125,000, $485,000 and $741,000 for 2006, 2005 and 2004,
respectively.
(R) FOREIGN CURRENCY AND RECLASSIFICATION
The functional currencies of the Company's foreign subsidiaries are their
respective local currencies. The financial statements are maintained in local
currencies and are translated to United States dollars using period-end rates of
exchange for assets and liabilities and average rates during the period for
revenues, cost of revenues and expenses. Translation gains and losses are
included in accumulated other comprehensive loss as a separate component of
stockholders' equity (deficit). Gains and losses from foreign currency
transactions are included in the consolidated statements of operations as part
of general and administrative expenses and amounted to $(53,000), $(151,000),
and $13,000 for the years ended December 31, 2006, 2005, and 2004, respectively.
The amounts for 2005 and 2004, previously reported as part of other income
(expense), have been reclassified to conform to the 2006 presentation.
(S) RECENT ACCOUNTING PRONOUNCEMENTS
In September 2006, the FASB issued Statement of Financial Accounting Standards
("SFAS") No. 157, "Fair Value Measurements". SFAS No. 157 clarifies the
principle that fair value should be based on the assumptions market participants
would use when pricing an asset or liability and establishes a fair value
hierarchy that prioritizes the information used to develop those assumptions.
SFAS No. 157 requires fair value measurements to be separately disclosed by
level within the fair value hierarchy. SFAS No. 157 is effective for financial
statements issued for fiscal years beginning after November 15, 2007, and
interim periods within those fiscal years. The Company is currently evaluating
the impact of adopting SFAS No. 157 on its future results of operations and
financial condition on January 1, 2008.
In September 2006, the Securities and Exchange Commission issued Staff
Accounting Bulletin ("SAB") No. 108, "Considering the Effects of Prior Year
Misstatements When Quantifying Misstatements in Current Year Financial
Statements". SAB No. 108 provides interpretive guidance on the consideration of
the effects of prior year misstatements in quantifying current year
misstatements for the purpose of assessing materiality. SAB No. 108 is effective
for fiscal years ending after November 15, 2006. The Company adopted SAB No. 108
in the fourth quarter of 2006 with no impact on its results of operations or
financial condition.
In July 2006, the FASB issued FASB Interpretation No. 48, Accounting for
Uncertainty in Income Taxes, an Interpretation of FASB Statement No. 109 ("FIN
48"). FIN 48 provides recognition criteria and a related measurement model for
tax positions taken by companies. In accordance with FIN 48, a tax position is a
position in a previously filed tax return or a position expected to be taken in
a future tax filing that is reflected in measuring current or deferred income
tax assets and liabilities. Tax positions shall be recognized only when it is
more likely than not (likelihood of greater than 50%), based on technical
merits, that the position will be sustained upon examination. Tax positions that
meet the more likely than not threshold should be measured using a probability
weighted approach as the largest amount of tax benefit that is greater than 50%
likely of being realized upon settlement. FIN 48 is effective for fiscal years
beginning after December 15, 2006 and the Company will adopt FIN 48 as of
January 1, 2007. The Company is currently evaluating the provisions of FIN 48 to
determine the potential impact, if any, the adoption will have on the Company's
financial statements.
(2) INCOME FROM DISCONTINUED OPERATIONS
The Company had previously provided a reserve of $928,000 for an unfavorable
judgment received in 2003 related to its discontinued World.com operations. The
reserve was reversed in 2006 after several favorable adjustments were received
by the Company upon appeal. The reversal had no tax affect because the Company
provided a full valuation allowance against the reserve when originally
recorded. Although the other party has filed a motion with the appeals court to
overturn the decision, management believes there is only a remote possibility
that an unfavorable outcome to this matter will occur. See Note 19 Commitments
and Contingencies - Legal Proceedings.
Other summarized financial information (In thousands) for the discontinued
operations is as follows:
41
BALANCE SHEET
DATA AS OF
DECEMBER 31,
-------------
2006 2005
---- -----
Cash......................................... $-- $ 17
Accrued expenses............................. -- 945
--- -----
Net liabilities of discontinued operations... $-- $(928)
=== =====
(3) ACQUISITION OF QUICKSTREAM SOFTWARE, INC.
On August 1, 2005 the Company completed the acquisition of Quickstream Software,
Inc., a software technology company, for a total purchase price of $699,000
which was comprised of approximately $342,000 in cash and 85,000 shares of the
Company's Class A common stock valued at approximately $357,000. The purchase of
Quickstream provided the Company with certain proprietary software that has been
integrated into the Company's network to add new features for certain of the
Company's services.
The results for Quickstream have been included in the consolidated financial
statements from the date of acquisition. The total purchase price, including
transaction costs, has been allocated over the acquired assets and assumed
liabilities with assistance from an independent appraiser. Goodwill of $197,000
has been recorded as a result of the allocation.
(4) SALE OF BUSINESSES/MAILWATCH SERVICE LINE
On July 31, 2004, the Company sold its MailWatch service line to Infocrossing,
Inc. for total consideration of approximately $5.0 million, including $3.5
million in cash and 123,193 shares of Infocrossing's common stock valued at
approximately $1.5 million. The sale resulted in a gain of $4.1 million before
income taxes. At December 31, 2004 an unrealized gain related to the
Infocrossing stock of $521,000 was included in the accumulated other
comprehensive gain (loss) account in stockholders' equity. The Infocrossing
stock was sold by the Company for $1.0 million in September, 2005 resulting in a
loss of $469,000 that is reported as other income (expense) in the statement of
operations.
In September 2005, the Company entered into two separate agreements for the sale
of its fax businesses, including the customer bases and customer premise
equipment, in Singapore and Malaysia. Consideration for the sales is based on
future revenues and, net of future costs, for the Malaysia transaction. Because
of the contingent nature of the proceeds, the Company will record these amounts
as received. The Company has recorded a loss on the sales of approximately
$250,000 in 2005 representing the net book value of the businesses at date of
sales. Contingent proceeds received in 2006 and included in other income
(expense) amounted to $121,000.
(5) SALE OF INTERNET DOMAIN NAMES
In December 2004, the Company sold its internet domain name portfolio and
related assets to its former Chairman of the Board of Directors for $1 million
and recognized a gain of $891,000 on the transaction in 2004. In addition to the
initial purchase price, the agreement provided for the Company to receive 15% of
all revenues related to the purchased domain names during the second and third
years following the sale and 10% of all such revenues in the fourth and fifth
years. The Company also had the option to purchase back substantially all the
domain names for $4.5 million at any time during the fourth and fifth years.
The former Chairman resigned as an employee of the Company and member of the
Board of Directors on the same day as the original domain name sale was
completed. Furthermore, he agreed to the conversion of all his 200,000 shares of
10 for 1 super-voting Class B common stock into 1 for 1 standard voting Class A
common stock. As a result, there are no Class B shares outstanding as of
December 31, 2006.
In August 2005, the Company entered into a new agreement to terminate its right
to receive a share of the revenues and its option to purchase back the domain
names for a total consideration of $2 million consisting of $700,000 in cash, a
$1,130,000 non-interest bearing note and the cancellation of $170,000 in
severance payments due to the former Chairman. The transaction resulted in a
gain of $1,907,000 in 2005 after recording the note payable at its estimated
fair value. As of December 31, 2006, the discounted outstanding balance on the
note, amounting to $477,000, is included in prepaid expenses and other current
assets.
(6) PROPERTY AND EQUIPMENT
Property and equipment, net of accumulated depreciation and amortization, are
stated at cost or allocated fair value and are summarized as follows, in
thousands:
42
DECEMBER 31,
-----------------
2006 2005
------- -------
Computer equipment and software ................. $33,558 $43,082
Furniture and fixtures .......................... 1,338 1,577
Leasehold improvements .......................... 4,316 4,196
------- -------
Subtotal ........................................ 39,212 48,855
Less accumulated depreciation and amortization .. 29,509 38,603
------- -------
Property and equipment, net ..................... $ 9,703 $10,252
======= =======
Depreciation and amortization expense of property and equipment totaled $3.0
million, $3.4 million, and $5.3 million for the years ended December 31, 2006,
2005 and 2004, respectively.
(7) GOODWILL AND INTANGIBLE ASSETS
The Company completed its annual assessment of its goodwill and indefinite-lived
intangible assets in the quarter ended December 31 for each of the years 2006,
2005 and 2004 with the assistance of an independent appraiser. The methodology
used to determine the business enterprise valuation of the Company was the
income approach, a discounted cash flow valuation method. The discount rate was
determined by using a weighted average cost of capital analysis which was
developed using a capital structure which reflects the representative historical
mix of debt and equity of a group of guideline companies in this business.
Assumptions for normal working capital levels and taxes were also incorporated
in the analysis. The value of the trademark and developed technology was based
on the income approach, relief-from-royalty method. This determines the value by
quantifying the cost savings a company enjoys by owning, as opposed to
licensing, the intangible asset. The value of the Company's customer base was
also determined through an income approach.
For 2006 and 2004, the Company determined that there were impairments of its
trademark of $550,000 and $750,000, respectively. The 2006 impairment was the
result of lower anticipated revenues related to the Company's EasyLink
trademark.
Included in the Company's balance sheet as of December 31, 2006 and 2005 are the
following (in thousands):
AS OF DECEMBER 31, 2006
----------------------------------
ACCUMULATED
GROSS COST AMORTIZATION NET
---------- ------------ ------
Intangibles with indefinite lives:
Goodwill ............................ $152,606 $(146,393) $6,213
======== ========= ======
Trademarks .......................... $ 14,700 $ (10,400) $4,300
======== ========= ======
Intangibles with finite lives:
Technology .......................... $ 16,550 $ (16,550) $ --
Customer list ....................... 11,000 (10,286) 714
Software development and licenses ... 4,545 (4,491) 55
-------- --------- ------
$ 32,095 $ (31,326) $ 769
======== ========= ======
AS OF DECEMBER 31, 2005
----------------------------------
ACCUMULATED
GROSS COST AMORTIZATION NET
---------- ------------ ------
Intangibles with indefinite lives:
Goodwill ............................ $152,606 $(146,393) $6,213
======== ========= ======
Trademarks .......................... $ 15,250 $ (10,400) $4,850
======== ========= ======
Intangibles with finite lives:
Technology .......................... $ 16,550 $ (16,234) $ 316
Customer list ....................... 11,000 (10,114) 886
Software development and licenses ... 4,564 (4,352) 212
-------- --------- ------
$ 32,114 $ (30,700) $1,414
======== ========= ======
43
The Company's estimated amortization expense is $0.2 million per year during the
four year period from 2007 through 2010. In accordance with Statement 142, the
Company reassessed the useful lives of all other intangible assets. There were
no changes to such lives and there are no expected residual values associated
with these intangible assets. Customer lists are being amortized on a
straight-line basis over ten years. Technology and software development and
licenses are being amortized on a straight-line basis over their estimated
useful lives from three to five years.
(8) CARRIER SETTLEMENT AGREEMENT
In November 2005, the Company entered into a Settlement Agreement with Verizon
Business (formerly MCI WorldCom) ("MCI") related to certain accounts receivable
and accounts payable balances with MCI that were outstanding prior to MCI's
bankruptcy filing in 2002. The agreement also included a settlement of claims
made by the Company that MCI had charged, and the Company had paid, amounts for
telecommunications services from MCI in excess of the contracted rates prior to
the bankruptcy filing. As a result of the settlement, the Company recorded a
$110,000 reduction of its bad debt expense representing the recovery of the
accounts receivable balance from MCI and recorded a reduction in its cost of
service for $540,000 representing the recovery of charges stemming from its
claim of excess telecommunication charges by MCI in 2005.
(9) SEPARATION AGREEMENT
In January 2005, the Company entered into a Separation Agreement with George Abi
Zeid, its former President of the International division, wherein Mr. Abi Zeid
resigned as an officer and director of the Company. Under the agreement, the
Company agreed to pay Mr. Abi Zeid $240,000 as a severance payment on the
effective date of his resignation and $1,960,000 in equal installments over
three years in consideration of the non-compete and other covenants contained in
the agreement. In connection with the agreement, the Company also agreed to pay
$200,000 of severance payments to two other former employees of the Company. As
of December 31, 2006 $609,000 related to the agreement is included in accrued
expenses and $79,000 is included in other long term liabilities.
(10) ACCRUED EXPENSES
Accrued expenses consist of the following, in thousands:
DECEMBER 31,
------------------
2006 2005
------- --------
Carrier charges ...................................................... $ 2,403 $ 2,558
Payroll and related costs ............................................ 2,269 1,611
Sales/Use/VAT taxes payable .......................................... 966 1,037
Federal, state and foreign income taxes payable ...................... 1,391 1,665
Professional services, consulting fees and sales agents commissions .. 1,180 1,411
Separation agreement payable, current portion ........................ 609 565
Other ................................................................ 1,481 1,585
------- --------
Total ................................................................ $10,299 $ 10,432
======= ========
(11) LOANS AND NOTES PAYABLE
Loans and notes payable include the following, in thousands:
DECEMBER 31,
----------------
2006 2005
------ -------
Advances payable................. $4,413 $ 950
Term loan payable................ -- 9,600
------ -------
Total loans and notes payable.... $4,413 $10,550
====== =======
44
Advances payable at December 31, 2006 represent the Company's outstanding
balance under a new $6.0 million credit facility with CAPCO Financial Company, a
division of Greater Bay Bank N.A. ("CAPCO") entered into in July 2006. The
facility provides for advances, subject to a maximum of 80% of certain accounts
receivable of the Company, that bear interest at the rate of 2% over the prime
rate of Greater Bay Bank. The facility has an initial term of 24 months, but can
be terminated by CAPCO after 12 months upon 90 days prior written notice if the
Company should fail to meet CAPCO's then existing underwriting credit criteria.
All assets of the Company in the United States are pledged as collateral to
CAPCO but there are no financial covenants under the facility. On July 27, 2006
the Company drew down an initial advance of $5.9 million and used the proceeds
to pay off the then outstanding loan balance with Wells Fargo Foothill (a
subsidiary of Wells Fargo Bank), along with other related fees and expenses. As
of December 31, 2006 the interest rate on the outstanding advances was 10.25%
and $135,000 was available under the facility for additional advances.
The Advances payable and Term loan payable as of December 31, 2005 were part of
a $15 million credit facility with Wells Fargo Foothill, Inc. (a subsidiary of
Wells Fargo Bank). The Term loan was payable monthly over 60 months with
interest payable monthly at the rate of 3.75% over the Wells Fargo prime rate.
As part of the original credit facility the Company could also draw down capital
advances up to $7.5 million based on certain circumstances and within certain
specified limitations. The credit facility included certain affirmative and
restrictive covenants, including maintenance of quarterly levels of EBITDA. On
February 27, 2006 the Company entered into an amendment to the credit agreement
with Wells Fargo establishing revised cumulative monthly EBITDA covenants but
eliminating the Company's ability to draw down any future advances and also
requiring the Company to pay the outstanding Advances balance of $950,000. The
amendment also required the Company to obtain at least $4.0 million in new
subordinated debt or equity financing and to prepay $3.0 million of the term
loan, both by May 1, 2006. The Company repaid the $950,000 in advances in
February 2006. In April 2006, the Company completed an equity financing with
certain existing shareholders and management for the sale of approximately 1.8
million shares of Class A common stock for $5.4 million and made the required $3
million prepayment on the term loan. However, since the Company's ability to
meet the original and revised EBITDA covenants was uncertain as of December 31,
2005, the total outstanding obligations under the credit agreement were included
in current liabilities in the consolidated balance sheet as of that date.
The Company entered into the Wells Fargo facility agreement on December 16, 2004
and used the proceeds from the Term Loan to repay all of its then outstanding
debt. As a result of the debt repayment, $984,000 of previously capitalized
interest on certain restructured debt was reversed and recognized as a gain on
debt restructurings and settlements. The capitalized interest had been recorded
in 2001 at the time of previous debt restructuring in accordance with SFAS No.
15, "Accounting by Debtors and Creditors for Troubled Debt Restructurings".
(12) LEASES
In addition to capital leases, the Company leases facilities and certain
equipment under agreements accounted for as operating leases. These leases
generally require the Company to pay all executory costs such as maintenance and
insurance. The lease for the Company's United States headquarters, laboratory
and network center includes rent escalations amounting to $362,000 per annum as
of July 1, 2006 and $67,000 per annum as of July 1, 2008. The escalations have
been accounted for on a straight-line basis over the entire term of the lease
which commenced on March 1, 2003 and terminates June 30, 2013. Rent expense for
operating leases for the years ending December 31, 2006, 2005 and 2004 was
approximately $3.8 million, $3.8 million, and $3.6 million, respectively.
At December 31, 2006 and 2005, the Company had $598,000 in gross amount of fixed
assets and $391,000 and $224,000, respectively, of related accumulated
amortization under capital leases. Future minimum lease payments under the
remaining capital leases and non-cancellable operating leases (with initial or
remaining lease terms in excess of one year) as of December 31, 2006 are as
follows, in thousands:
YEAR ENDING
DECEMBER 31,
-------------------
CAPITAL OPERATING
LEASES LEASES
------- ---------
2007.......................................................... $25 $ 2,752
2008.......................................................... 19 2,416
2009.......................................................... 21 2,250
2010.......................................................... 2 2,158
2011.......................................................... -- 2,021
2012 and later................................................ -- 2,265
--- -------
Total minimum lease payments.................................. $67 $13,862
=== =======
Less current portion of obligations under capital leases...... 25
---
Obligations under capital leases, excluding current portion... $42
===
(13) RELATED PARTY TRANSACTIONS
45
In April 2006, in connection with the private placement of 1.8 million shares of
the Company's Class A common stock, Federal Partners purchased approximately
824,000 shares at a purchase price of $3.00 per share or $2.5 million in the
aggregate. Stephen Duff, a director of the Company since April 2006, is Chief
Investment Officer of The Clark Estates, Inc. Mr. Duff is also both a limited
partner and the Treasurer of the general partner of Federal Partners, L.P. As a
result of the transaction, Federal Partners and accounts for which The Clark
Estates, Inc. provides management and administrative services, raised their
beneficial holdings to approximately 9.5 million shares or 17.5% of the
Company's outstanding Class A common stock.
(14) CAPITAL STOCK
In August 2006, the Company implemented a 1 for 5 reverse stock split of all
issued and outstanding Class A common stock which has been reflected in the
financial statements for all periods presented.
COMMON STOCK
VOTING RIGHTS
Each share of Class A common stock has one vote per share. Prior to the
conversion into Class A common stock in December 2004, 200,000 shares of Class B
common stock, which were owned by the Chairman, had ten votes per share.
PRIVATE PLACEMENT OF COMMON STOCK
In April 2006, the Company completed an equity financing with certain existing
share holders and management for the sale of approximately 1.8 million shares of
Class A common stock valued at approximately $5.4 million.
UNDESIGNATED PREFERRED SHARES
The Company is authorized, without further stockholder approval, to issue
authorized but unissued shares of preferred stock in one or more classes or
series. At December 31, 2006 and 2005, 60,000,000 authorized shares of
undesignated preferred stock were available for creation and issuance in this
manner.
(15) STOCK BASED COMPENSATION
The Company has adopted several stock option plans and assumed the plans of
entities it had acquired in prior periods. In June 2005, the Company adopted the
2005 stock and incentive plan (the "2005 Plan") which provides for the granting
of stock options and other stock based awards. In 2006, the 2005 Plan was
amended to increase shares available for grant from 200,000 to 600,000. Under
the Company's stock based plans a total of 1,615,000 shares were originally
reserved for awards, of which 588,362 shares are available for future awards as
of December 31, 2006. Options granted under the plans have exercise prices equal
to fair market value of the Company's stock at the time of grant and generally
expire within 7 to 10 years. The Company issues shares of its authorized but
previously unissued Class A common stock upon the exercise of any options or
issuance of shares under other awards.
Compensation expense was recorded for the Company's stock option plans in
accordance with the modified prospective method as per SFAS 123(R) and amounted
to approximately $148,000 for the year ended December 31, 2006. During 2006, the
Company issued 129,577 shares of restricted stock that vest over a four year
period to certain executive employees. Awards for 4,725 shares were forfeited
during 2006 resulting in awards for 124,852 shares being outstanding as of
December 31, 2006. The weighted average grant date fair value for all the shares
was $4.09. Compensation expense for these awards amounted to $30,000 for the
year ended December 31, 2006. All amounts specified as compensation expense are
net of the related tax effect, which amounted to zero as the Company records a
full valuation allowance against its U.S. net deferred tax assets. There was
approximately $804,000 of total unrecognized compensation cost related to
nonvested options and awards as of December 31, 2006 that will be recognized
over the next four years. The expense is amortized on a straight line basis
over the vesting period.
The fair value of option grants made in the twelve months ended December 31,
2006, amounting to approximately $112,000, are estimated as of the date of grant
using the Black Scholes method option-pricing model with the following
assumptions: dividend yield of 0%, average risk-free interest rate of 4.6 -
5.2%, expected life of 4.6 - 6.1 years and volatility of 91 - 104%.
A summary of the Company's stock option activity and weighted average exercise
prices is as follows:
46
FOR THE YEAR ENDED DECEMBER 31,
--------------------------------------------------------------------------
2006 2005 2004
-------------------------- --------------------- ---------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
OPTIONS PRICE OPTION PRICE OPTION PRICE
---------- ------------ ----------- -------- ---------- --------
Options outstanding at
beginning of period ......... 1,030,427 $17.10 1,018,453 $19.00 976,396 $20.00
Options granted ................ 40,000 $ 3.54 191,400 $ 4.80 88,200 $ 6.85
Options canceled or expired .... (100,004) $13.75 (150,213) $19.60 (37,283) $19.60
Options exercised .............. (1,000) $ 2.65 (29,212) $ 3.65 (8,860) $ 3.75
---------- ------ ---------- ------ ---------- ------
Options outstanding at
end of period ............... 969,423 $14.05 1,030,427 $17.10 1,018,453 $19.00
========== ====== ========== ====== ========== ======
Options exercisable at period
End ......................... 869,485 904,705 663,746
========== ========== ==========
Weighted average fair value
of options granted during
The period .................. $ 2.79 $ 4.00 $ 4.50
========== ========== ==========
The following table summarizes information about stock options outstanding and
exercisable at December 31, 2006:
Options Outstanding Options Exercisable
------------------------------------------------- ------------------------------
ACTUAL RANGE NUMBER WEIGHTED-AVERAGE NUMBER
OF EXERCISE PRICES OUTSTANDING REMAINING WEIGHTED-AVERAGE EXERCISABLE WEIGHTED-AVERAGE
150% INCREMENT AT 12/31/06 CONTRACTUAL LIFE EXERCISE PRICE AT 12/31/06 EXERCISE PRICE
------------------ ----------- ---------------- ---------------- ----------- ----------------
$ 2.65-3.95 121,755 6.9 $ 3.08 77,130 $ 2.81
$ 4.05-5.75 265,373 6.8 $ 4.83 219,435 $ 4.93
$ 6.15-8.75 381,610 6.7 $ 6.38 372,235 $ 6.37
$ 9.40-14.00 104,821 4.6 $ 10.77 104,821 $ 10.77
$ 15.00-21.00 7,939 4.3 $ 19.54 7,939 $ 19.54
$ 24.00-35.95 1,477 4.1 $ 29.36 1,477 $ 29.36
$ 37.50-54.70 3,393 0.5 $ 49.66 3,393 $ 49.66
$ 64.05-84.40 68,275 3.3 $ 74.18 68,275 $ 74.18
$100.00-100.00 1,636 1.0 $100.00 1,636 $100.00
$162.20-875.00 13,144 1.6 $213.60 13,144 $213.60
-------------- ------- --- ------- ------- -------
$ 2.65-875.00 969,423 6.1 $ 14.05 869,485 $ 15.18
The effect of adopting SFAS 123R on our income from operations, income before
income taxes, net income and basic and diluted net income per share for 2006 was
as follows:
2006
-------
($ IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Income from continuing operations, as reported..................... $ 29
Effect of adopting SFAS 123R ...................................... 148
-------
Proforma income from continuing operations......................... $ 177
=======
Loss from continuing operations before income taxes, as reported $(1,026)
Effect of adopting SFAS 123R ...................................... 148
-------
Proforma loss from continuing operations before income taxes....... $ (878)
=======
Net loss, as reported ............................................. $ (67)
Effect of adopting SFAS 123R ...................................... 148
-------
Proforma net income................................................ $ 81
=======
Basic and diluted net loss, as reported............................ $ (0.01)
Effect of adopting SFAS 123R ...................................... 0.01
-------
Proforma basic net income (loss) per share......................... $ 0.00
=======
47
The Company had previously adopted the disclosure provisions of SFAS No. 148 as
of December 31, 2002 and applied the measurement provisions of APB 25 through
December 31, 2005. Under APB Opinion No. 25, compensation expense is recognized
based upon the difference, if any, at the measurement date between the market
value of the stock and the option exercise price and amortized on a
straight-line basis over the vesting period. The measurement date is the date at
which both the number of options and the exercise price for each option are
known. The following table illustrates the effect on net income (loss) and net
income (loss) per share for the years ended December 31, 2005 and 2004 if the
fair value recognition provisions of SFAS No. 123 had been applied to
stock-based employee compensation.
2005 2004
------- -------
($ IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Net income (loss):
Net income (loss), as reported........................... $(1,085) $ 7,690
Deduct total stock based employee compensation expense
determined under the fair value method for all awards,
net of tax............................................ (1,732) (2,769)
------- -------
Proforma net income (loss)............................... $(2,817) $ 4,921
======= =======
Basic net income (loss) per share:
Net income (loss), as reported........................... $ (0.12) $ 0.87
Deduct total stock based employee compensation
expense determined under the fair value method for
all awards, net of tax................................ $ (0.19) $ (0.31)
------- -------
Proforma basic net income (loss) per share............... $ (0.31) $ 0.56
======= =======
Diluted net income (loss) per share:
Net income (loss), as reported........................... $ (0.12) $ 0.86
Deduct total stock based employee compensation
Expense determined under the fair value method for
All awards, net of tax................................ $ (0.19) $ (0.31)
------- -------
Proforma diluted net income (loss)....................... $ (0.31) $ 0.55
======= =======
In December, 2005 the Company accelerated the vesting of all current employee
options with an exercise price in excess of $4.60 per share to avoid the
recording of this expense in 2007 and future periods when the Company adopted
FAS 123R. This action resulted in a $1,038,000 increase in the stock based
compensation and proforma loss for 2005 as reflected above.
The fair value of each option grant is estimated on the date of grant using the
Black Scholes method option-pricing model with the following assumptions used
for grants made in 2005: dividend yield of zero percent (0%), average risk-free
interest rate of 3.9%, expected life of 5 years and volatility of 119%, 2004:
dividend yield of zero percent (0%), average risk-free interest rate of 3.4%,
expected life of 5 years and volatility of 119%.
(16) EMPLOYEE STOCK AND SAVINGS PLANS
EMPLOYEE STOCK PURCHASE PLAN
On June 20, 2006, the stockholders of the Company approved the EasyLink Services
Corporation Employee Stock Purchase Plan (the "ESPP"). The purpose of the ESPP
is to provide an incentive to a broad-based group of the Company's employees to
acquire a proprietary interest in the Company, to continue their positions with
the Company and to increase their efforts on the Company's behalf. An aggregate
of 400,000 shares of Class A common stock has been reserved for issuance under
the ESPP. The Company has not yet implemented the ESPP and, accordingly, no
shares of stock had been sold thereunder as of December 31, 2006.
401 (K) PLAN
48
On January 3, 2000, the Company established a 401(k) Plan ("the plan") for its
U.S. employees. Subject to Internal Revenue Code limitations, participants may
contribute from 1% to 15% of pay each pay period on a before tax basis, subject
to statutory limits. Such contributions are fully and immediately vested. The
Company will match 50% of the first 6% of an employee's contribution with shares
of Class A common stock. Vesting of the Company's matching contributions begins
at 20% after the first anniversary of date of hire or plan commencement date,
whichever is later, increasing by 20% each year thereafter through the fifth
year until full vesting occurs. The Company's matching contributions of 125,400,
99,923 and 54,626 shares of Class A common stock, for the years ended December
31, 2006, 2005 and 2004, respectively resulted in compensation expense of
$425,000, $475,000, and $400,000, respectively.
UNITED KINGDOM PENSION PLANS
The Company has two pension plans in the United Kingdom. Participants must
contribute a minimum of 2.5% of pay each period on a before tax basis, subject
to statutory limits. Such contributions are fully and immediately vested. The
Company will contribute 9.5% to 10.5% of a participant's pay. Vesting of the
Company's contribution is immediate. The Company's contributions for the years
ended December 31, 2006, 2005 and 2004 amounted to approximately $295,000,
$295,000 and $344,000, respectively.
(17) RESTRUCTURING CHARGES
The Company's restructuring activities relate to costs for future lease
commitments, net of estimated sublease rentals. In December 2006 the Company
closed its Glen Head, NY facility and migrated the network operations previously
conducted there to its new data center in Piscataway, NJ. Accordingly, the
Company recorded a restructuring reserve and general and administrative expense
of $206,000 for the lease commitment for the facility net of an estimated amount
for the possible sublease of the premises. In 2004, based upon revised estimates
of previously recorded lease abandonment costs, largely due to a negotiated
settlement of liability on one lease, $350,000 of restructuring charges were
reversed.
The following sets forth the activity in the Company's restructuring reserve (in
thousands):
FOR THE YEAR ENDED DECEMBER 31, 2006
----------------------------------------------
CURRENT
YEAR CURRENT
BEGINNING PROVISION YEAR ENDING
BALANCE (REVERSAL) UTILIZATION BALANCE
--------- ---------- ----------- -------
Lease abandonments...... $172 $206 $(172) $206
==== ==== ===== ====
FOR THE YEAR ENDED DECEMBER 31, 2005
----------------------------------------------
CURRENT
YEAR CURRENT
BEGINNING PROVISION YEAR ENDING
BALANCE (REVERSAL) UTILIZATION BALANCE
--------- ---------- ----------- -------
Lease abandonments...... $903 $-- $(731) $172
==== === ===== ====
FOR THE YEAR ENDED DECEMBER 31, 2004
----------------------------------------------
CURRENT
YEAR CURRENT
BEGINNING PROVISION YEAR ENDING
BALANCE (REVERSAL) UTILIZATION BALANCE
--------- ---------- ----------- -------
Lease abandonments...... $2,747 $(350) $(1,494) $903
====== ===== ======= ====
(18) INCOME TAXES
Income (loss) before provision (credit) for income taxes in 2006, 2005 and 2004
is comprised of the following (in thousands):
2006 2005 2004
------- ------- -------
United States........... $(5,108) $(3,207) $ 8,301
Foreign................. 4,082 1,772 1,789
------- ------- -------
$(1,026) $(1,435) $10,090
======= ======= =======
49
The provision (credit) for income taxes in 2006, 2005 and 2004 consist of the
following (in thousands):
2006 2005 2004
----- ----- ------
Current taxes:
Federal................. $(930) $(805) $1,735
State................... 80 35 370
Foreign................. 986 420 295
----- ----- ------
136 (350) 2,400
----- ----- ------
Deferred Foreign taxes.. (167) -- --
----- ----- ------
$ (31) $(350) $2,400
===== ===== ======
The difference between the statutory Federal income tax rate of 35% and the
company's effective tax rate for the years ended December 31, 2006, 2005 and
2004 is principally due to the utilization of Federal, state and foreign net
operating losses for which the Company had recorded a full valuation allowance,
state income taxes, including minimum taxes, net of federal tax benefit and
foreign taxes.
As of December 31, 2006 and 2005, the Company had approximately $22.3 million
and $17.1 million of federal net operating loss carryforwards available to
offset future taxable income. Such carryforwards expire through 2026.
Additionally, the Company had $2.1 million and $1.9 million, respectively, of
foreign net operating loss carryforwards at December 31, 2006 and 2005, which
have no expiration date.
The effects of temporary differences and tax loss carryforwards that give rise
to significant portions of deferred tax assets and deferred tax liabilities at
December 31, 2006 and 2005 are presented below, in thousands.
2006 2005
-------- --------
Deferred tax assets:
Net operating loss carryforwards..................... $ 9,486 $ 8,294
Allowance for doubtful accounts...................... 447 626
Depreciation and amortization........................ 2,171 2,234
Accrued expenses and restructuring reserve not
currently deductible for tax Purposes............. 812 1,109
-------- --------
12,916 12,263
Deferred tax liabilities:
Accrued refund of Federal excise taxes............... (64) --
-------- --------
12,852 12,263
Valuation allowance.................................. (12,685) (12,263)
-------- --------
Net deferred tax assets and liabilities.............. $ 167 $ 0
======== ========
Based upon the level of historical losses and after considering projections for
future taxable income over the periods in which the deferred tax assets are
expected to be deductible, the Company has recorded a valuation allowance
against its United States and certain foreign net deferred tax assets, including
the remaining net operating loss carryforwards, since it believes that it is not
more likely that not that these assets will be realized. In 2006 the Company has
50
not recorded a valuation allowance against its UK tax benefits that expected to
be realized in 2007 and 2008, based on the profitable results of this subsidiary
for the past two years and expected results for the next two years. The Company
believes it is more likely than not that the tax benefits for those two years
will be realized.
(19) COMMITMENTS AND CONTINGENCIES
MASTER CARRIER AGREEMENT
Under a Master Carrier Agreement the Company entered into with AT&T in July,
2005, the Company has a minimum purchase commitment of a variety of
telecommunication services amounting to $5 million over the two year term of the
agreement. As of December 31, 2006, the Company had purchased $4.8 million of
the related services and expects to meet the remaining commitment during the
first quarter of 2007.
LEGAL PROCEEDINGS
From time to time the Company has been, and expects to continue to be, subject
to legal proceedings and claims in the ordinary course of business. These
include claims of alleged infringement of third-party patents, trademarks,
copyrights, domain names and other similar proprietary rights; employment
claims; claims alleging unsolicited commercial faxes sent on behalf of the
Company's customers; and contract claims. These claims include claims that some
of the Company's services employ technology covered by third party patents.
These claims, even if not meritorious, could require us to expend significant
financial and managerial resources. No assurance can be given as to the outcome
of one or more claims of this nature. If an infringement claim were determined
in a manner adverse to the Company, it may be required to discontinue use of any
infringing technology, to pay damages and/or to pay ongoing license fees which
would increase the costs of providing service.
In connection with the termination of an agreement to sell the portal operations
of the Company's discontinued India.com business, the Company brought suit
against a broker that it had engaged in connection with the proposed sale of the
portal operations alleging, among other things, breach of contract and
misrepresentation. The broker brought a counterclaim against the Company for a
brokerage fee that would have been payable on the closing of the proposed sale.
In 2003 the District Court entered a judgment in the amount of $928,000 against
the Company. On June 20, 2005, the Court of Appeals reversed the District
Court's ruling that the broker was a third party beneficiary of the terminated
agreement and set aside the $928,000 of damages. The Court of Appeals, however,
also determined that the District Court had not fully resolved the issue of
whether the Company had breached the agreement to sell the portal operations for
the express purpose of avoiding the broker's commission. Accordingly, the Court
of Appeals remanded the case to the District Court for further consideration. In
2006 upon consideration of the issue remanded, the District Court issued a
decision to enter judgment in the Company's favor. The broker filed a motion to
amend that judgment and/or order a new trial. This appeal was denied by the
court. The broker has filed another appeal to overturn the court's decision and
the parties are awaiting the decision of the appeal.
OTHER
In 2005 the Company received a New York State sales tax assessment of $414,000
based upon an audit of one of its operating subsidiaries for 2001 through 2004.
The Company disputes the finding of the audit and has been in the process of
appealing the assessment since it was received. Most recently, on November 20,
2006, the Company submitted a Petition for Redetermination to the New York State
Division of Tax Appeals. The Division of Taxation denied the appeal and the
dispute will now be submitted to the New York State tax court for consideration.
If the Company is not successful in its appeal of the assessment, the Company's
estimated liability, including interest,penalties and 2005 and 2006 taxes, at
December 31, 2006 would be approximately $500,000. The Company has provided what
it believes to be the probable cost of $316,000 for this assessment as of
December 31, 2006 in accordance with FAS No. 5 " Accounting for Contingencies".
(20) GEOGRAPHIC DISCLOSURE
GEOGRAPHIC INFORMATION
FOR THE YEARS ENDED
---------------------------
2006 2005 2004
------- ------- -------
United States:
Revenues............................................. $52,164 $54,630 $67,973
Operating income (loss).............................. (3,896) (3,478) 7,378
Total assets......................................... 32,935 36,914 43,625
Long lived assets.................................... 20,435 22,087 22,039
All other regions:
Revenues............................................. 21,861 24,029 23,867
51
Operating income (loss).............................. 3,925 1,285 1,721
Total assets......................................... 8,298 7,061 6,720
Long lived assets.................................... 550 641 894
Significant country included in all other regions
United Kingdom:
Revenues............................................. 19,845 21,059 20,516
Operating income (loss).............................. 3,829 1,943 2,296
Total assets......................................... 7,193 5,688 5,544
Long lived assets.................................... 482 588 568
Geographic data is classified based on the location of the Company's operation
that provides selling and general account maintenance of the customer's
accounts.
(21) RESTATEMENT OF 2004 FINANCIAL STATEMENTS
The Company has restated its previously issued financial statements for the year
ended December 31, 2004 in a Form 10K/A filed on December 8, 2005. The Company's
determination to restate these previously issued financial statements stems from
the following items:
1. The liability for telecommunication services costs of the Company's United
Kingdom subsidiary was over-stated. The Company has revised its methodology
to more accurately estimate this liability resulting in a decrease in the
estimated liability and related costs of revenues of $603,000 for 2004.
2. The Company had recorded accruals for certain assessed Federal regulatory
fees in prior years although the amounts of such assessments were disputed
by the Company. Based upon revised assessments received by the Company in
the 4th quarter of 2004, the amounts of such accruals were in excess of the
revised assessments. However, the Company did not timely adjust the
recorded liability for this change in circumstances. The amount of the
accrual no longer required and adjusted for in the restatement is $296,000.
3. The Company has determined that it did not properly account for certain
equipment purchased in prior years. As a result the Company has recorded
$47,000 in additional depreciation expense in 2004 related to these assets.
4. The Company has evaluated its liability in connection with a New York State
sales tax audit of one of its operating subsidiaries for 2001 through 2004.
The Company has now determined that the estimated liability for these taxes
should have been increased in the 4th quarter of 2004 based on a tax
assessment received in 2005 but prior to the issuance of the Company's Form
10K for the year ended December 31, 2004. The increase in the estimated
liability is $90,000.
5. The Company incorrectly calculated the net operating loss carry forwards of
its United Kingdom subsidiaries as of December 31, 2003 resulting in the
under accrual of foreign income tax liabilities of $295,000 in 2004.
6. The restatement also includes the recording of adjustments in prior periods
that were not recorded in these periods because in each case and in the
aggregate the amount of these errors were not material to the Company's
consolidated financial statements.
7. The Company had incorrectly classified and recorded currency translation
losses at December 31, 2004. As a result, the accumulated other
comprehensive loss account included in stockholders' equity at December 31,
2004 has been increased by $166,000 and accrued expenses has been reduced
by such amount.
The following schedules show the impact of the restatement on the relevant
captions from the Company's consolidated statements of operations and cash
flows for the year ended December 31, 2004.
52
CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 2004
ADJUSTMENTS
--------------------------------------------
AS
PREVIOUSLY
REPORTED AMOUNT NO. AS RESTATED
---------- ------- ------- -----------
TOTAL REVENUES ..................................... $91,840 $91,840
Operating expenses:
Cost of revenues ................................... 36,725 (596) 1,6 36,129
------- ------- -------
GROSS PROFIT ....................................... 55,115 596 55,711
Sales and marketing ................................ 18,715 18,715
General and administrative ......................... 23,794 (63) 2,3,4,6 23,731
Product development: ............................... 6,730 6,730
Amortization of Intangibles ........................ 2,066 2,066
Restructuring Charge ............................... (350) (350)
Impairment of intangible assets .................... 500 250 6 750
Gain on sale of buisnesses/MailWatch service line (5,017) (5,017)
------- ------- -------
46,438 187 46,625
INCOME FROM OPERATIONS ............................. 8,677 409 9,086
Interest income .................................... 70 177 6 247
Interest expense ................................... (517) (517)
Other income (expense) ............................. 288 2 6 290
Gain on settlement of debt ......................... 984 984
------- ------- -------
Income before income taxes ......................... 9,502 588 10,090
------- ------- -------
Provision for income taxes ......................... 1,900 500 5,6 2,400
------- ------- -------
NET INCOME ......................................... $ 7,602 $ 88 $ 7,690
======= ======= =======
BASIC NET INCOME PER SHARE ......................... $ 0.87 $ 0.00 $ 0.87
======= ======= =======
DILUTED NET INCOME PER SHARE ....................... $ 0.86 $ 0.00 $ 0.86
======= ======= =======
COMPREHENSIVE INCOME ............................... $ 7,802 $ (78) $ 7,724
======= ======= =======
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 2004
ADJUSTMENTS
---------------------------------------
AS
PREVIOUSLY
REPORTED AMOUNT NO. AS RESTATED
---------- ------ --- -----------
Net cash provided by operating
activities of continuing operations... $ 6,278 $(324) $ 5,954
======= ===== =======
Net cash provided by investing
Activities............................ 1,530 406 1,936
======= ===== =======
Net cash used in financing
Activities............................ (1,502) -- (1,502)
======= ===== =======
Net increase in cash and cash
Equivalents........................... 5,977 (84) 5,893
======= ===== =======
(22) VALUATION AND QUALIFYING ACCOUNTS
Additions and write-offs charged to the allowance for doubtful accounts are
presented below, in thousands.
53
ADDITIONS
BALANCE AT (RECOVERIES) BALANCE
BEGINNING CHARGED TO DEDUCTIONS/ AT END
OF YEAR EXPENSES WRITE-OFFS OF PERIOD
---------- ------------ ----------- ---------
For the year ended December 31, 2004... $4,824 $ 450 $1,324 $3,950
For the year ended December 31, 2005... $3,950 $ 59 $1,679 $2,330
For the year ended December 31, 2006... $2,330 $(164) $ 561 $1,605
The Company provides telex services to governmental telecommunications companies
throughout the world and completes telex transactions for its customers on the
networks of these companies. In prior years when telex service was in greater
use, most of these transactions were settled on a net basis with receivables and
payables balances remaining outstanding for prolonged periods of time. The
Company recorded provisions for bad debts based on the age of its receivables.
Recently many of these governmental companies have discontinued or curtailed
their telex businesses and the Company has been successful in collecting
receivables that had been provided for in the allowance for bad debts. In 2006 a
total of $226,000 of the allowance for doubtful accounts was reversed as no
longer needed for these receivables resulting in the net credit provision for
doubtful accounts of $164,000 in the above schedule for the year.
(23) QUARTERLY FINANCIAL INFORMATION - UNAUDITED
Condensed Quarterly Consolidated Statements of Operations for 2006 and 2005 are
as follows (in thousands, except per share data):
YEAR 2006
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
------- -------- ------- -------
Revenues....................................................... $18,461 $18,852 $18,689 $18,023
Cost of revenues............................................... 7,463 7,895 6,872 6,770
------- ------- ------- -------
Gross profit................................................... 10,998 10,957 11,817 11,253
------- ------- ------- -------
Operating expenses............................................. 11,428 10,905 11,441 11,222
------- ------- ------- -------
Income (loss) from operations.................................. (430) 52 376 31
Other income(expense), net..................................... (295) (65) (523) (172)
------- ------- ------- -------
Income (loss) before income taxes from continuing operations (725) (13) (147) (141)
Provision (credit) for income taxes............................ (349) 76 284 (42)
------- ------- ------- -------
Net income (loss) from continuing operations................... $ (376) $ (89) $ (431) $ (99)
Income from discontinued operations............................ -- -- 928 --
------- ------- ------- -------
Net income (loss).............................................. $ (376) $ (89) $ 497 $ (99)
======= ======= ======= =======
Basic and diluted net income (loss) per share:
Income (loss) from continuing operations.................... $ (0.04) $ (0.01) $ (0.04) $ (0.01)
Income from discontinued operations......................... -- -- 0.08 --
------- ------- ------- -------
Net income (loss) per share................................. $ (0.04) $ (0.01) $ 0.04 $ (0.01)
======= ======= ======= =======
YEAR 2005
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
------- -------- ------- -------
Revenues....................................................... $20,378 $20,070 $19,701 $18,510
Cost of revenues............................................... 7,769 6,986 8,169 7,004
------- ------- ------- -------
Gross profit................................................... 12,609 13,084 11,532 11,506
------- ------- ------- -------
Operating expenses............................................. 15,258 11,654 12,401 11,449
------- ------- ------- -------
54
Income (loss) from operations.................................. (2,649) 1,430 (869) 57
Gain on Domain names repurchase
agreement................................................... -- -- 1,907 --
Other income(expense), net..................................... (277) (374) (759) 100
------- ------- ------- -------
Income (loss) before income taxes.............................. (2,926) 1,056 279 157
Provision (credit) for income taxes............................ (185) 290 (65) (390)
======= ======= ======= =======
Net income (loss).............................................. $(2,741) $ 766 $ 344 $ 547
======= ======= ======= =======
Basic and diluted net income (loss)per
shares...................................................... $ (0.31) $ 0.09 $ 0.04 $ 0.06
======= ======= ======= =======
Due to changes in the number of shares outstanding, quarterly loss per share
amounts do not necessarily add to the totals for the years.
ITEM 9 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
Not applicable.
ITEM 9A CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
The Company maintains disclosure controls and procedures designed to ensure that
information required to be disclosed by the Company in the reports that it files
or submits under the Exchange Act is recorded, processed, summarized and
reported within the time periods specified in the Commission's rules and forms.
Disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e)
under the Exchange Act, include controls and procedures designed to ensure that
information required to be disclosed by the company in the reports we file or
submit under the Exchange Act is accumulated and communicated to our Company's
management, including our chief executive officer and chief financial officer,
as appropriate, to allow timely decisions regarding required disclosure. It
should be noted that any system of controls, however well designed and operated,
can provide only reasonable, and not absolute, assurance that the objectives of
the system are met.
As required by Securities and Exchange Commission rules, we have evaluated the
effectiveness of the design and operation of our disclosure controls and
procedures as of the end of the period covered by this annual report. This
evaluation was carried out under the supervision and with the participation of
our management, including our principal executive officer and principal
financial officer. Based on this evaluation, these officers have concluded that
as of December 31, 2006, the Company's disclosure controls and procedures were
effective.
55
PART III (ITEM 10, ITEM 11, ITEM 12, ITEM 13 AND ITEM 14)
The information required by Items 10 through 14 in this Part III is omitted
pursuant to General Instruction G of Form 10-K. This information will be
included in an amendment to this Form 10-K or in a definitive proxy statement
pursuant to Regulation 14A, to be filed not later than 120 days after December
31, 2006.
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) CONSOLIDATED FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
(1) Consolidated Financial Statements: See Item 8.
(2) Financial Statement Schedules: All schedules normally required by Form 10-K
are omitted since they are either not applicable or the required
information is shown in the consolidated financial statements or the notes
thereto.
(b) EXHIBITS
Some of the exhibits referenced below are incorporated by reference to filings
made by EasyLink Services Corporation before the date hereof.
2.1+ Agreement and Plan of Merger by and among Mail.com, Inc., ML
Acquisition Corp., Swift Telecommunications, Inc. ("STI") and George
Abi Zeid, as sole shareholder of STI, dated as of January 31, 2001
(Incorporated by reference to Exhibit 2.1 of Mail.com, Inc.'s
Current Report on Form 8-K filed February 8, 2001)
2.2+ Asset Purchase dated December 14, 2000 between AT&T Corp. and Swift
Telecommunications, Inc. (Incorporated by reference to Exhibit 2.1
of EasyLink Services Corporation's Current Report on Form 8-K filed
March 9, 2001)
3.1.1 Amended and Restated Certificate of Incorporation (Incorporated by
reference to Exhibit 4.1 of Mail.com, Inc.'s Registration Statement
on Form S-8 filed June 19, 2000)
3.1.2 Certificate of Amendment of Amended and Restated Certificate of
Incorporation (Incorporated by reference to Exhibit 4.2 of Mail.com,
Inc.'s Registration Statement on Form S-8 filed June 19, 2000)
3.1.3 Certificate of Ownership and Merger (Incorporated by reference to
Exhibit 3.3 of EasyLink Services Corporation's Annual Report on Form
10-K filed April 2, 2001)
3.1.4 Certificate of Amendment of Amended and Restated Certificate of
Incorporation (Incorporated by reference to Exhibit 4.1 of EasyLink
Services Corporation's Current Report on Form 8-K filed January 22,
2002)
3.1.5 Certificate of Amendment to the Amended and Restated Certificate of
Incorporation (Incorporated by reference to Exhibit 3.1 of EasyLink
Services Corporation's Current Report on Form 8-K filed August 25,
2006)
3.1.6 Certificate of Amendment of Amended and Restated Certificate of
Incorporation, as amended, of EasyLink Services Corporation filed
June 5, 2001
3.2 By-Laws (Incorporated by reference to Exhibit 10.3 of EasyLink
Services Corporation's Current Report on Form 8-K filed April 5,
2005)
4.1 Specimen Class A common stock certificate (Incorporated by reference
to Exhibit 4.1 to EasyLink Services Corporation's Annual Report on
Form 10-K filed April 1, 2002)
10.1 Thomas Murawski Employment Agreement:
10.1.1 Employment Agreement between EasyLink Services Corporation and
Thomas Murawski dated February 1, 2002 (Incorporated by reference to
Exhibit 10 to Amendment No. 1 to EasyLink Services Corporation's
Registration Statement on Form S-3 filed February 20, 2002)
10.1.2 Amendment No. 1 dated as of August 8, 2003 to Employment Agreement
between Thomas Murawski and the Company (Incorporated by reference
to Exhibit 10.1 of EasyLink Services Corporation's Quarterly Report
on Form 10-Q filed August 14, 2003)
10.1.3 Amendment No. 2 dated February 16, 2007 to Employment Agreement
between Thomas Murawski and the Company (Incorporated by reference
to Exhibit 10.1 of EasyLink Services Corporation's Current Report on
Form 8-K filed February 16, 2007)
10.2 Gerald Gorman Agreements:
56
10.2.1+ Domain Portfolio Purchase Agreement made the 23rd day of December,
2004, by and among Easylink Services Corporation; NJ Domains LLC;
and Gerald Gorman (Incorporated by reference to Exhibit 10.1 to
EasyLink Services Corporation's Current Report on Form 8-K filed
December 28, 2004)
10.2.2 Guaranty of Domain Portfolio Purchase Agreement made and delivered
the 23rd day of December, 2004, by Gerald Gorman in favor of
EasyLink Services Corporation (Incorporated by reference to Exhibit
10.2 to EasyLink Services Corporation's Current Report on Form 8-K
filed December 28, 2004)
10.2.3 Release made and delivered the 23rd day of December, 2004 by Gerald
Gorman in favor of EasyLink Services Corporation (Incorporated by
reference to Exhibit 10.5 to EasyLink Services Corporation's Current
Report on Form 8-K filed December 28, 2004)
10.2.4 Release made and delivered the 23rd day of December, 2004 by
EasyLink Services Corporation in favor of Gerald Gorman
(Incorporated by reference to Exhibit 10.6 to EasyLink Services
Corporation's Current Report on Form 8-K filed December 28, 2004)
10.2.5+ Amendment No. 1 to Domain Portfolio Purchase Agreement dated August
22, 2005 among EasyLink Services Corporation, NJ Domains LLC and
Gerald Gorman (Incorporated by reference to Exhibit 10.1 to EasyLink
Services Corporation's Current Report on Form 8-K filed August 26,
2005)
10.2.6 Secured Promissory Note dated August 22, 2005 issued by NJ Domains
LLC in favor of EasyLink Services Corporation (Incorporated by
reference to Exhibit 10.2 to EasyLink Services Corporation's Current
Report on Form 8-K filed August 26, 2005)
10.2.7 Security Agreement dated August 22, 2005 entered into by NJ Domains
LLC in favor of EasyLink Services Corporation (Incorporated by
reference to Exhibit 10.3 to EasyLink Services Corporation's Current
Report on Form 8-K filed August 26, 2005)
10.2.8 Guaranty dated August 22, 2005 issued by Gerald Gorman in favor of
EasyLink Services Corporation (Incorporated by reference to Exhibit
10.4 to EasyLink Services Corporation's Current Report on Form 8-K
filed August 26, 2005)
10.3.1 Separation Agreement between EasyLink Services Corporation and
George Abi Zeid dated January 28, 2005 (Incorporated by reference to
Exhibit 10.6 to EasyLink Services Corporation's Current Report on
Form 8-K filed January 28, 2005)
10.3.2 Reaffirmation Agreement made as of July 23, 2004, by and among
EasyLink Services Corporation (f/k/a Mail.com, Inc.), a Delaware
corporation, Swift Telecommunications, Inc., a Delaware corporation,
and George Abi Zeid (Incorporated by reference to Exhibit 10.1 to
EasyLink Services Corporation's Quarterly Report on Form 10-Q filed
August 16, 2004)
10.4 Employment Agreement between EasyLink Services Corporation and
Michael A. Doyle dated March 22, 2004 (Incorporated by reference to
Exhibit 10.5 to EasyLink Services Corporation's Annual Report on
Form 10-K filed March 30, 2004)
10.5 Employment Agreement between EasyLink Services Corporation and Gary
MacPhee dated August 28, 2002 (Incorporated by reference to Exhibit
10.5 to EasyLink Services Corporation's Annual Report on Form 10-K
filed March 31, 2006)
10.6 Employment Agreement between EasyLink Services Corporation and Rick
Gooding dated March 26, 2001 (Incorporated by reference to Exhibit
10.6 to EasyLink Services Corporation's Annual Report on Form 10-K
filed March 31, 2006)
10.7 2006 Executive Incentive Plan (Incorporated by reference to Exhibit
10.1 of EasyLink Services Corporation's Current Report on Form 8-K
filed April 28, 2006)
10.8 Stock Plans:
10.8.1 EasyLink Services Corporation 2005 Stock and Incentive Plan
(Incorporated by reference to Appendix A to EasyLink Services
Corporation's Definitive Proxy Statement on Schedule 14A filed May
16, 2005)
10.8.2 EasyLink Services Corporation 2003 Stock Option Plan (Incorporated
by reference to Appendix A to Definitive Proxy Statement of EasyLink
Services Corporation filed July 1, 2003)
10.8.3 EasyLink Services Corporation 2002 Stock Option Plan (Incorporated
by reference to Appendix A to Definitive Proxy Statement of EasyLink
Services Corporation filed April 23, 2002)
10.8.4 EasyLink Services Corporation 2001 Stock Option Plan (Incorporated
by reference to Appendix B to Definitive Proxy Statement of EasyLink
Services Corporation filed April 27, 2001)
10.8.5 Mail.com, Inc. 2000 Stock Option Plan (Incorporated by reference to
Exhibit 10.1 of Mail.com, Inc.'s Registration Statement on Form S-8
filed June 19, 2000)
10.8.6 Mail.com, Inc. Supplemental 2000 Stock Option Plan (Incorporated by
reference to Exhibit 10.3 of Mail.com, Inc.'s Registration Statement
on Form S-8 filed June 19, 2000)
57
10.8.7 1999 Employee Stock Option Plan (Incorporated by reference to
Exhibit 10.16 to Amendment No. 1 to Form S-1 Registration Statement
filed May 4, 1999)
10.8.8 Mail.com, Inc. Supplemental 1999 Stock Option Plan (Incorporated by
reference to Exhibit 10.2 of Mail.com, Inc.'s Registration Statement
on Form S-8 filed June 19, 2000)
10.8.9 1998 Employee Stock Option Plan (Incorporated by reference to
Exhibit 10.15 to Amendment No. 1 to Form S-1 Registration Statement
filed May 4, 1999)
10.8.10 1997 Employee Stock Option Plan (Incorporated by reference to
Exhibit 10.14 to Amendment No. 1 to Form S-1 Registration Statement
filed May 4, 1999)
10.8.11 1996 Employee Stock Option Plan (Incorporated by reference to
Exhibit 10.13 to Amendment No. 1 to Form S-1 Registration Statement
filed May 4, 1999)
10.8.12 Mail.com, Inc. Allegro Group Stock Option Plan (Incorporated by
reference to Exhibit 10.iii(A)(1) of Mail.com, Inc.'s Quarterly
Report on Form 10-Q filed November 15, 1999)
10.8.13 Mail.com, Inc. TCOM Stock Option Plan (Incorporated by reference to
Exhibit 10.iii(A)(2) of Mail.com, Inc.'s Quarterly Report on Form
10-Q filed November 15, 1999)
10.8.14 1990 Stock Option Plan (Incorporated by reference to Exhibit 10.3 to
NetMoves Corporation's Registration Statement on Form S-1,
Registration No. 333-09613 ("NetMoves Registration Statement"))
10.8.15 1996 Stock Option/Stock Issuance Plan (Incorporated by reference to
Exhibit 10.4 to NetMoves Registration Statement)
10.8.16 Description of Stock Option Issued to Thomas Murawski (Incorporated
by reference to Form of Notice To Record Shareholders of Mail.com,
Inc. contained in Exhibit 99.1 of Mail.com, Inc.'s Current Report on
Form 8-K filed January 17, 2001)
10.9 Stock Option Agreements:
10.9.1 Form of Stock Option Agreement for options granted under the
Company's stock option plans (version providing 6 month period to
exercise following termination for reasons other than cause or
performance) (Incorporated by reference to Exhibit 10.30.1 of
EasyLink Services Corporation's Annual Report on Form 10-K filed
April 12, 2005)
10.9.2 Form of Stock Option Agreement for options granted under the
Company's stock option plans (version providing 12 month period to
exercise following termination for reasons other than cause or
performance) (Incorporated by reference to Exhibit 10.30.2 of
EasyLink Services Corporation's Annual Report on Form 10-K filed
April 12, 2005)
10.9.3 Form of Stock Option Agreement for options granted under the
Company's stock option plans (version providing 18 month period to
exercise following termination for reasons other than cause or
performance) (Incorporated by reference to Exhibit 10.30.3 of
EasyLink Services Corporation's Annual Report on Form 10-K filed
April 12, 2005)
10.9.4 Form of Stock Option Agreement for options granted under the
Company's stock option plans (version providing 24 month period to
exercise following termination for reasons other than cause or
performance) (Incorporated by reference to Exhibit 10.30.4 of
EasyLink Services Corporation's Annual Report on Form 10-K filed
April 12, 2005)
10.9.5 Form of Stock Option Agreement for options granted under the
Company's stock option plans (version providing 60 day period to
exercise following termination for reasons other than cause or
performance) (Incorporated by reference to Exhibit 10.30.5 of
EasyLink Services Corporation's Annual Report on Form 10-K filed
April 12, 2005)
10.9.6 Stock Option Agreement between Mail.com and Gerald Gorman dated
December 31, 1996 (Incorporated by reference to Exhibit 10.10 to
Amendment No. 1 to Form S-1 Registration Statement filed May 4,
1999)
10.9.7 Stock Option Agreement between Mail.com. and Gerald Gorman dated
June 1, 1996 (Incorporated by reference to Exhibit 10.11 to
Amendment No. 1 to Form S-1 Registration Statement filed May 4,
1999)
10.10 Form of Indemnification Agreement for Directors and Officers
(Incorporated by reference to Exhibit 10.1 of EasyLink Services
Corporation's Quarterly Report on Form 10-Q filed May 15, 2003)
10.11 Lease Agreement between EasyLink Services Corporation and BT
Piscataway, LLC dated July 23, 2003 relating to leased premises at
the Company's headquarters located at 33 Knightsbridge Road,
Piscataway, New Jersey (Incorporated by reference to Exhibit 10.33
to EasyLink Services Corporation's Annual Report on Form 10-K filed
March 30, 2004)
10.12 Designation Letter dated January 8, 2001 from Mail.com, Inc. to
Federal Partners, L.P. (Incorporated by reference to Exhibit 99.4 of
Mail.com, Inc.'s Current Report on Form 8-K filed January 10, 2001)
10.13 Registration Rights Agreement dated as of March 13, 2001, by and
between Mail.com, Inc. and the investor listed therein (Incorporated
by reference to Exhibit 99.4 of Mail.com, Inc.'s Current Report on
Form 8-K filed March 26, 2001)
58
10.14 AT&T Corp. Telecommunications Services Agreements:
10.14.1 Amended and Restated Master Carrier Agreement between EasyLink
Services Corporation and AT&T Corp. entered into on July 21, 2005
(Incorporated by reference to Exhibit 99.1 to EasyLink Services
Corporation's Current Report on Form 8-K/A filed August 10, 2005)
10.14.2 MCA Supplemental Terms & Conditions (Incorporated by reference to
MCA Supplemental Terms & Conditions attached to Master Carrier
Agreement dated January 31, 2001 between AT&T Corp. and Swift
Telecommunications, Inc. contained in Exhibit 2.3 to EasyLink
Services Corporation's Current Report on Form 8-K filed March 9,
2001)
10.14.3 AT&T Network Connection Platform Service Description Attachment
(Incorporated by reference to Exhibit 99.2 to EasyLink Services
Corporation's Current Report on Form 8-K/A filed August 10, 2005)
10.14.4** AT&T Network Connection Service Terms and Pricing Attachments
entered into on July 21, 2005** (Incorporated by reference to
Exhibit 99.3 to EasyLink Services Corporation's Current Report on
Form 8-K/A filed August 10, 2005)
10.14.5* AT&T MEGACOM Service & AT&T MEGACOM 800 Service Terms and Pricing
Attachment* (Incorporated by reference to Exhibit 10.48.4 to
EasyLink Services Corporation's Annual Report on Form 10-K filed
March 30, 2004)
10.14.6** AT&T Service Provider Markets - Service Order Attachment; AT&T
Internet Transport Services entered into on July 21, 2005**
(Incorporated by reference to Exhibit 99.4 to EasyLink Services
Corporation's Current Report on Form 8-K/A filed August 10, 2005)
10.14.7** AT&T UNIPLAN Service Terms and Pricing Attachment entered into on
July 21, 2005** (Incorporated by reference to Exhibit 99.5 to
EasyLink Services Corporation's Current Report on Form 8-K/A filed
August 10, 2005)
10.14.8* AT&T Asynchronous Transfer Mode Service Order Attachment to MCA *
(Incorporated by reference to Exhibit 10.2 to EasyLink Services
Corporation Quarterly Report on Form 10-Q filed May 14, 2004)
10.14.9** AT&T Data Service Terms and Pricing Attachment entered into on July
21, 2005** (Incorporated by reference to Exhibit 99.6 to EasyLink
Services Corporation's Current Report on Form 8-K/A filed August 10,
2005)
10.14.10 Amendment to Intellectual Property Agreement between AT&T Corp. and
EasyLink Services Corporation entered into on July 21, 2005
(Incorporated by reference to Exhibit 99.7 to EasyLink Services
Corporation's Current Report on Form 8-K/A filed August 10, 2005)
10.15 Warrants:
10.15.1 Warrant dated November 27, 2001 issued to GATX Financial Corporation
to purchase 251,000 shares of Class A common stock at an exercise
price of $6.10 per share (after giving effect to January 2002
reverse stock split) (Incorporated by reference to Exhibit 10.49 to
EasyLink Services Corporation's Annual Report on Form 10-K filed
March 30, 2004)
10.15.2 Warrant dated November 27, 2001 issued to GATX Financial Corporation
to purchase 11,500 shares of Class A common stock at an exercise
price of $6.10 per share (after giving effect to January 2002
reverse stock split) (Incorporated by reference to Exhibit 10.50 to
EasyLink Services Corporation's Annual Report on Form 10-K filed
March 30, 2004)
10.15.3 Warrant dated November 27, 2001 issued to CitiCapital Commercial
Leasing Corporation to purchase 48,611 shares of Class A common
stock at an exercise price of $6.10 per share (after giving effect
to January 2002 reverse stock split) (Incorporated by reference to
Exhibit 10.51 to EasyLink Services Corporation's Annual Report on
Form 10-K filed March 30, 2004)
10.15.4 Warrant dated November 27, 2001 issued to Forsythe/McArthur
Associates, Inc. to purchase 64,351 shares of Class A common stock
at an exercise price of $6.10 per share (after giving effect to
January 2002 reverse stock split) (Incorporated by reference to
Exhibit 10.52 to EasyLink Services Corporation's Annual Report on
Form 10-K filed March 30, 2004)
10.15.6 Warrant dated November 27, 2001 issued to Pentech Financial
Services, Inc. to purchase 51,860 shares of Class A common stock at
an
59
exercise price of $6.10 per share (after giving effect to January
2002 reverse stock split) (Incorporated by reference to Exhibit
10.53 to EasyLink Services Corporation's Annual Report on Form 10-K
filed March 30, 2004)
10.15.7 Warrant dated November 27, 2001 issued to Phoenix Leasing
Incorporated to purchase 34,289 shares of Class A common stock at an
exercise price of $6.10 per share (after giving effect to January
2002 reverse stock split) (Incorporated by reference to Exhibit
10.54 to EasyLink Services Corporation's Annual Report on Form 10-K
filed March 30, 2004)
10.15.8 Warrant dated November 27, 2001 issued to George Abi Zeid to
purchase 268,297 shares of Class A common stock at an exercise price
of $6.10 per share (after giving effect to January 2002 reverse
stock split) (Incorporated by reference to Exhibit 10.55 to EasyLink
Services Corporation's Annual Report on Form 10-K filed March 30,
2004)
10.15.9 Warrant dated November 27, 2001 issued to Fleet Business Credit, LLC
to purchase 663,172 shares of Class A common stock at an exercise
price of $6.10 per share (after giving effect to January 2002
reverse stock split) (Incorporated by reference to Exhibit 10.56 to
EasyLink Services Corporation's Annual Report on Form 10-K filed
March 30, 2004)
10.16 Deferred Stock Unit Agreement (Incorporated by reference to Exhibit
10.1 of EasyLink Services Corporation's Current Report on Form 8-K
filed August 7, 2006)
10.17 Restricted Unit Agreement (Incorporated by reference to Exhibit 10.2
of EasyLink Services Corporation's Current Report on Form 8-K filed
August 7, 2006)
10.18 Restricted Stock Agreement (Incorporated by reference to Exhibit
10.3 of EasyLink Services Corporation's Current Report on Form 8-K
filed August 7, 2006)
10.19+ Common Stock Purchase Agreement dated as of April 13, 2006 between
EasyLink Services Corporation and the investors named therein
(Incorporated by reference to Exhibit 10.1 of EasyLink Services
Corporation's Quarterly Report on Form 10-Q filed May 15, 2006)
10.20 Registration Rights Agreement dated as of April 13, 2006 between
EasyLink Services Corporation and the investors named therein
(Incorporated by reference to Exhibit 10.2 of EasyLink Services
Corporation's Quarterly Report on Form 10-Q filed May 15, 2006)
10.21 Contract of Sale and Security Agreement dated for purposes of
reference July 20, 2006 between EasyLink Services Corporation,
EasyLink Services USA, Inc. and CAPCO Financial Company, a division
of Greater Bay Bank N.A. (Incorporated by reference to Exhibit 10.1
of EasyLink Services Corporation's Current Report on Form 8-K filed
August 2, 2006)
10.22 Form of Executive Severance agreement entered into on June 22, 2006
with certain members of management (Incorporated by reference to
Exhibit 10.3 of EasyLink Services Corporation's Current Report on
Form 8-K filed June 22, 2006)
21 Subsidiaries of EasyLink Services Corporation
23 Consents:
23.1 Consent of KPMG LLP
23.2 Consent of Grant Thornton LLP
31 Certifications
31.1 Certification of Principal Executive Officer pursuant to Section 302
of the Sarbanes-Oxley Act of 2002
60
31.2 Certification of Principal Financial Officer pursuant to Section 302
of the Sarbanes-Oxley Act of 2002
32.1 Certification of Principal Executive Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
32.2 Certification of Principal Financial Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
* Confidential treatment granted.
** Confidential treatment requested
+ Disclosure schedules and other attachments are omitted, but will be
furnished supplementally to the Commission upon request.
Financial Statement Schedules
None
61
Signatures
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized, on March 26, 2007.
EasyLink Services Corporation
(Registrant)
By /s/ THOMAS F. MURAWSKI
-------------------------------------
(Thomas F. Murawski, Chairman,
President and Chief Executive
Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities indicated on March 27, 2007.
/s/ THOMAS F. MURAWSKI Chairman, President and Chief Executive Officer, Director
------------------------------------- (Principal Executive Officer)
(Thomas F. Murawski)
/s/ MICHAEL A. DOYLE Vice President and Chief Financial Officer
------------------------------------- (Principal Accounting and Financial Officer)
(Michael A. Doyle)
/s/ ROBERT J. CASALE Director
-------------------------------------
(Robert J. Casale)
/s/ STEPHEN DUFF Director
-------------------------------------
(Stephen Duff)
/s/ PETER J. HOLZER Director
-------------------------------------
(Peter J. Holzer)
/s/ GEORGE F. KNAPP Director
-------------------------------------
(George F. Knapp)
/s/ JOHN C. PETRILLO Director
-------------------------------------
(John C. Petrillo)
/s/ DENNIS R. RANEY Director
-------------------------------------
(Dennis R. Raney)
/s/ ERIC J. ZAHLER Director
-------------------------------------
(Eric J. Zahler)
62
EXHIBIT INDEX
Some of the exhibits referenced below are incorporated by reference
to filings made by EasyLink Services Corporation before the date
hereof.
2.1+ Agreement and Plan of Merger by and among Mail.com, Inc., ML
Acquisition Corp., Swift Telecommunications, Inc. ("STI") and George
Abi Zeid, as sole shareholder of STI, dated as of January 31, 2001
(Incorporated by reference to Exhibit 2.1 of Mail.com, Inc.'s
Current Report on Form 8-K filed February 8, 2001)
2.2+ Asset Purchase dated December 14, 2000 between AT&T Corp. and Swift
Telecommunications, Inc. (Incorporated by reference to Exhibit 2.1
of EasyLink Services Corporation's Current Report on Form 8-K filed
March 9, 2001)
3.1.1 Amended and Restated Certificate of Incorporation (Incorporated by
reference to Exhibit 4.1 of Mail.com, Inc.'s Registration Statement
on Form S-8 filed June 19, 2000)
3.1.2 Certificate of Amendment of Amended and Restated Certificate of
Incorporation (Incorporated by reference to Exhibit 4.2 of Mail.com,
Inc.'s Registration Statement on Form S-8 filed June 19, 2000)
3.1.3 Certificate of Ownership and Merger (Incorporated by reference to
Exhibit 3.3 of EasyLink Services Corporation's Annual Report on Form
10-K filed April 2, 2001)
3.1.4 Certificate of Amendment of Amended and Restated Certificate of
Incorporation (Incorporated by reference to Exhibit 4.1 of EasyLink
Services Corporation's Current Report on Form 8-K filed January 22,
2002)
3.1.5 Certificate of Amendment to the Amended and Restated Certificate of
Incorporation (Incorporated by reference to Exhibit 3.1 of EasyLink
Services Corporation's Current Report on Form 8-K filed August 25,
2006)
3.1.6 Certificate of Amendment of Amended and Restated Certificate of
Incorporation, as amended, of EasyLink Services Corporation filed
June 5, 2001
3.2 By-Laws (Incorporated by reference to Exhibit 10.3 of EasyLink
Services Corporation's Current Report on Form 8-K filed April 5,
2005)
4.1 Specimen Class A common stock certificate (Incorporated by reference
to Exhibit 4.1 to EasyLink Services Corporation's Annual Report on
Form 10-K filed April 1, 2002)
10.1 Thomas Murawski Employment Agreement:
10.1.1 Employment Agreement between EasyLink Services Corporation and
Thomas Murawski dated February 1, 2002 (Incorporated by reference to
Exhibit 10 to Amendment No. 1 to EasyLink Services Corporation's
Registration Statement on Form S-3 filed February 20, 2002)
10.1.2 Amendment No. 1 dated as of August 8, 2003 to Employment Agreement
between Thomas Murawski and the Company (Incorporated by reference
to Exhibit 10.1 of EasyLink Services Corporation's Quarterly Report
on Form 10-Q filed August 14, 2003)
10.1.3 Amendment No. 2 dated February 16, 2007 to Employment Agreement
between Thomas Murawski and the Company (Incorporated by reference
to Exhibit 10.1 of EasyLink Services Corporation's Current Report on
Form 8-K filed February 16, 2007)
10.2 Gerald Gorman Agreements:
10.2.1+ Domain Portfolio Purchase Agreement made the 23rd day of December,
2004, by and among Easylink Services Corporation; NJ Domains LLC;
and Gerald Gorman (Incorporated by reference to Exhibit 10.1 to
EasyLink Services Corporation's Current Report on Form 8-K filed
December 28, 2004)
10.2.2 Guaranty of Domain Portfolio Purchase Agreement made and delivered
the 23rd day of December, 2004, by Gerald Gorman in favor of
EasyLink Services Corporation (Incorporated by reference to Exhibit
10.2 to EasyLink Services Corporation's Current Report on Form 8-K
filed December 28, 2004)10.2.3 Release made and delivered the 23rd
day of December, 2004 by Gerald Gorman in favor of EasyLink Services
Corporation (Incorporated by reference to Exhibit 10.5 to EasyLink
Services Corporation's Current Report on Form 8-K filed December 28,
2004)
10.2.4 Release made and delivered the 23rd day of December, 2004 by
EasyLink Services Corporation in favor of Gerald Gorman
(Incorporated by reference to Exhibit 10.6 to EasyLink Services
Corporation's Current Report on Form 8-K filed December 28, 2004)
63
10.2.5+ Amendment No. 1 to Domain Portfolio Purchase Agreement dated August
22, 2005 among EasyLink Services Corporation, NJ Domains LLC and
Gerald Gorman (Incorporated by reference to Exhibit 10.1 to EasyLink
Services Corporation's Current Report on Form 8-K filed August 26,
2005)
10.2.6 Secured Promissory Note dated August 22, 2005 issued by NJ Domains
LLC in favor of EasyLink Services Corporation (Incorporated by
reference to Exhibit 10.2 to EasyLink Services Corporation's Current
Report on Form 8-K filed August 26, 2005)
10.2.7 Security Agreement dated August 22, 2005 entered into by NJ Domains
LLC in favor of EasyLink Services Corporation (Incorporated by
reference to Exhibit 10.3 to EasyLink Services Corporation's Current
Report on Form 8-K filed August 26, 2005)
10.2.8 Guaranty dated August 22, 2005 issued by Gerald Gorman in favor of
EasyLink Services Corporation (Incorporated by reference to Exhibit
10.4 to EasyLink Services Corporation's Current Report on Form 8-K
filed August 26, 2005)
10.3.1 Separation Agreement between EasyLink Services Corporation and
George Abi Zeid dated January 28, 2005 (Incorporated by reference to
Exhibit 10.6 to EasyLink Services Corporation's Current Report on
Form 8-K filed January 28, 2005)
10.3.2 Reaffirmation Agreement made as of July 23, 2004, by and among
EasyLink Services Corporation (f/k/a Mail.com, Inc.), a Delaware
corporation, Swift Telecommunications, Inc., a Delaware corporation,
and George Abi Zeid (Incorporated by reference to Exhibit 10.1 to
EasyLink Services Corporation's Quarterly Report on Form 10-Q filed
August 16, 2004)
10.4 Employment Agreement between EasyLink Services Corporation and
Michael A. Doyle dated March 22, 2004 (Incorporated by reference to
Exhibit 10.5 to EasyLink Services Corporation's Annual Report on
Form 10-K filed March 30, 2004)
10.5 Employment Agreement between EasyLink Services Corporation and Gary
MacPhee dated August 28, 2002 (Incorporated by reference to Exhibit
10.5 to EasyLink Services Corporation's Annual Report on Form 10-K
filed March 31, 2006)
10.6 Employment Agreement between EasyLink Services Corporation and Rick
Gooding dated March 26, 2001 (Incorporated by reference to Exhibit
10.6 to EasyLink Services Corporation's Annual Report on Form 10-K
filed March 31, 2006)
10.7 2006 Executive Incentive Plan (Incorporated by reference to Exhibit
10.1 of EasyLink Services Corporation's Current Report on Form 8-K
filed April 28, 2006)
10.8 Stock Plans:
10.8.1 EasyLink Services Corporation 2005 Stock and Incentive Plan
(Incorporated by reference to Appendix A to EasyLink Services
Corporation's Definitive Proxy Statement on Schedule 14A filed May
16, 2005)
10.8.2 EasyLink Services Corporation 2003 Stock Option Plan (Incorporated
by reference to Appendix A to Definitive Proxy Statement of EasyLink
Services Corporation filed July 1, 2003)
10.8.3 EasyLink Services Corporation 2002 Stock Option Plan (Incorporated
by reference to Appendix A to Definitive Proxy Statement of EasyLink
Services Corporation filed April 23, 2002)
10.8.4 EasyLink Services Corporation 2001 Stock Option Plan (Incorporated
by reference to Appendix B to Definitive Proxy Statement of EasyLink
Services Corporation filed April 27, 2001)
10.8.5 Mail.com, Inc. 2000 Stock Option Plan (Incorporated by reference to
Exhibit 10.1 of Mail.com, Inc.'s Registration Statement on Form S-8
filed June 19, 2000)
10.8.6 Mail.com, Inc. Supplemental 2000 Stock Option Plan (Incorporated by
reference to Exhibit 10.3 of Mail.com, Inc.'s Registration Statement
on Form S-8 filed June 19, 2000)
10.8.7 1999 Employee Stock Option Plan (Incorporated by reference to
Exhibit 10.16 to Amendment No. 1 to Form S-1 Registration Statement
filed May 4, 1999)
10.8.8 Mail.com, Inc. Supplemental 1999 Stock Option Plan (Incorporated by
reference to Exhibit 10.2 of Mail.com, Inc.'s Registration Statement
on Form S-8 filed June 19, 2000)
10.8.9 1998 Employee Stock Option Plan (Incorporated by reference to
Exhibit 10.15 to Amendment No. 1 to Form S-1 Registration Statement
filed May 4, 1999)
10.8.10 1997 Employee Stock Option Plan (Incorporated by reference to
Exhibit 10.14 to Amendment No. 1 to Form S-1 Registration Statement
filed May 4, 1999)
10.8.11 1996 Employee Stock Option Plan (Incorporated by reference to
Exhibit 10.13 to Amendment No. 1 to Form S-1 Registration Statement
filed May 4, 1999)
64
10.8.12 Mail.com, Inc. Allegro Group Stock Option Plan (Incorporated by
reference to Exhibit 10.iii(A)(1) of Mail.com, Inc.'s Quarterly
Report on Form 10-Q filed November 15, 1999)
10.8.13 Mail.com, Inc. TCOM Stock Option Plan (Incorporated by reference to
Exhibit 10.iii(A)(2) of Mail.com, Inc.'s Quarterly Report on Form
10-Q filed November 15, 1999)
10.8.14 1990 Stock Option Plan (Incorporated by reference to Exhibit 10.3 to
NetMoves Corporation's Registration Statement on Form S-1,
Registration No. 333-09613 ("NetMoves Registration Statement"))
10.8.15 1996 Stock Option/Stock Issuance Plan (Incorporated by reference to
Exhibit 10.4 to NetMoves Registration Statement)
10.8.16 Description of Stock Option Issued to Thomas Murawski (Incorporated
by reference to Form of Notice To Record Shareholders of Mail.com,
Inc. contained in Exhibit 99.1 of Mail.com, Inc.'s Current Report on
Form 8-K filed January 17, 2001)
10.9 Stock Option Agreements:
10.9.1 Form of Stock Option Agreement for options granted under the
Company's stock option plans (version providing 6 month period to
exercise following termination for reasons other than cause or
performance) (Incorporated by reference to Exhibit 10.30.1 of
EasyLink Services Corporation's Annual Report on Form 10-K filed
April 12, 2005)
10.9.2 Form of Stock Option Agreement for options granted under the
Company's stock option plans (version providing 12 month period to
exercise following termination for reasons other than cause or
performance) (Incorporated by reference to Exhibit 10.30.2 of
EasyLink Services Corporation's Annual Report on Form 10-K filed
April 12, 2005)
10.9.3 Form of Stock Option Agreement for options granted under the
Company's stock option plans (version providing 18 month period to
exercise following termination for reasons other than cause or
performance) (Incorporated by reference to Exhibit 10.30.3 of
EasyLink Services Corporation's Annual Report on Form 10-K filed
April 12, 2005)
10.9.4 Form of Stock Option Agreement for options granted under the
Company's stock option plans (version providing 24 month period to
exercise following termination for reasons other than cause or
performance) (Incorporated by reference to Exhibit 10.30.4 of
EasyLink Services Corporation's Annual Report on Form 10-K filed
April 12, 2005)
10.9.5 Form of Stock Option Agreement for options granted under the
Company's stock option plans (version providing 60 day period to
exercise following termination for reasons other than cause or
performance) (Incorporated by reference to Exhibit 10.30.5 of
EasyLink Services Corporation's Annual Report on Form 10-K filed
April 12, 2005)
10.9.6 Stock Option Agreement between Mail.com and Gerald Gorman dated
December 31, 1996 (Incorporated by reference to Exhibit 10.10 to
Amendment No. 1 to Form S-1 Registration Statement filed May 4,
1999)
10.9.7 Stock Option Agreement between Mail.com. and Gerald Gorman dated
June 1, 1996 (Incorporated by reference to Exhibit 10.11 to
Amendment No. 1 to Form S-1 Registration Statement filed May 4,
1999)
10.10 Form of Indemnification Agreement for Directors and Officers
(Incorporated by reference to Exhibit 10.1 of EasyLink Services
Corporation's Quarterly Report on Form 10-Q filed May 15, 2003)
10.11 Lease Agreement between EasyLink Services Corporation and BT
Piscataway, LLC dated July 23, 2003 relating to leased premises at
the Company's headquarters located at 33 Knightsbridge Road,
Piscataway, New Jersey (Incorporated by reference to Exhibit 10.33
to EasyLink Services Corporation's Annual Report on Form 10-K filed
March 30, 2004)
10.12 Designation Letter dated January 8, 2001 from Mail.com, Inc. to
Federal Partners, L.P. (Incorporated by reference to Exhibit 99.4 of
Mail.com, Inc.'s Current Report on Form 8-K filed January 10, 2001)
10.13 Registration Rights Agreement dated as of March 13, 2001, by and
between Mail.com, Inc. and the investor listed therein.
(Incorporated by reference to Exhibit 99.4 of Mail.com, Inc.'s
Current Report on Form 8-K filed March 26, 2001)
10.14 AT&T Corp. Telecommunications Services Agreements:
10.14.1 Amended and Restated Master Carrier Agreement between EasyLink
Services Corporation and AT&T Corp. entered into on July 21, 2005
(Incorporated by reference to Exhibit 99.1 to EasyLink Services
Corporation's Current Report on Form 8-K/A filed August 10, 2005)
10.14.2 MCA Supplemental Terms & Conditions (Incorporated by reference to
MCA Supplemental Terms & Conditions attached to Master Carrier
Agreement dated January 31, 2001 between AT&T Corp. and Swift
Telecommunications, Inc. contained in Exhibit 2.3 to EasyLink
Services Corporation's Current Report on Form 8-K filed March 9,
2001)
10.14.3 AT&T Network Connection Platform Service Description Attachment
(Incorporated by reference to Exhibit 99.2 to EasyLink Services
Corporation's Current Report on Form 8-K/A filed August 10, 2005)
65
10.14.4** AT&T Network Connection Service Terms and Pricing Attachments
entered into on July 21, 2005** (Incorporated by reference to
Exhibit 99.3 to EasyLink Services Corporation's Current Report on
Form 8-K/A filed August 10, 2005)
10.14.5* AT&T MEGACOM Service & AT&T MEGACOM 800 Service Terms and Pricing
Attachment* (Incorporated by reference to Exhibit 10.48.4 to
EasyLink Services Corporation's Annual Report on Form 10-K filed
March 30, 2004)
10.14.6** AT&T Service Provider Markets - Service Order Attachment; AT&T
Internet Transport Services entered into on July 21, 2005**
(Incorporated by reference to Exhibit 99.4 to EasyLink Services
Corporation's Current Report on Form 8-K/A filed August 10, 2005)
10.14.7** AT&T UNIPLAN Service Terms and Pricing Attachment entered into on
July 21, 2005** (Incorporated by reference to Exhibit 99.5 to
EasyLink Services Corporation's Current Report on Form 8-K/A filed
August 10, 2005)
10.14.8* AT&T Asynchronous Transfer Mode Service Order Attachment to MCA *
(Incorporated by reference to Exhibit 10.2 to EasyLink Services
Corporation Quarterly Report on Form 10-Q filed May 14, 2004)
10.14.9** AT&T Data Service Terms and Pricing Attachment entered into on July
21, 2005** (Incorporated by reference to Exhibit 99.6 to EasyLink
Services Corporation's Current Report on Form 8-K/A filed August 10,
2005)
10.14.10 Amendment to Intellectual Property Agreement between AT&T Corp. and
EasyLink Services Corporation entered into on July 21, 2005
(Incorporated by reference to Exhibit 99.7 to EasyLink Services
Corporation's Current Report on Form 8-K/A filed August 10, 2005)
10.15 Warrants:
10.15.1 Warrant dated November 27, 2001 issued to GATX Financial Corporation
to purchase 251,000 shares of Class A common stock at an exercise
price of $6.10 per share (after giving effect to January 2002
reverse stock split) (Incorporated by reference to Exhibit 10.49 to
EasyLink Services Corporation's Annual Report on Form 10-K filed
March 30, 2004)
10.15.2 Warrant dated November 27, 2001 issued to GATX Financial Corporation
to purchase 11,500 shares of Class A common stock at an exercise
price of $6.10 per share (after giving effect to January 2002
reverse stock split) (Incorporated by reference to Exhibit 10.50 to
EasyLink Services Corporation's Annual Report on Form 10-K filed
March 30, 2004)
10.15.3 Warrant dated November 27, 2001 issued to CitiCapital Commercial
Leasing Corporation to purchase 48,611 shares of Class A common
stock at an exercise price of $6.10 per share (after giving effect
to January 2002 reverse stock split) (Incorporated by reference to
Exhibit 10.51 to EasyLink Services Corporation's Annual Report on
Form 10-K filed March 30, 2004)
10.15.4 Warrant dated November 27, 2001 issued to Forsythe/McArthur
Associates, Inc. to purchase 64,351 shares of Class A common stock
at an exercise price of $6.10 per share (after giving effect to
January 2002 reverse stock split) (Incorporated by reference to
Exhibit 10.52 to EasyLink Services Corporation's Annual Report on
Form 10-K filed March 30, 2004)
10.15.6 Warrant dated November 27, 2001 issued to Pentech Financial
Services, Inc. to purchase 51,860 shares of Class A common stock at
an exercise price of $6.10 per share (after giving effect to January
2002 reverse stock split) (Incorporated by reference to Exhibit
10.53 to EasyLink Services Corporation's Annual Report on Form 10-K
filed March 30, 2004)
10.15.7 Warrant dated November 27, 2001 issued to Phoenix Leasing
Incorporated to purchase 34,289 shares of Class A common stock at an
exercise price of $6.10 per share (after giving effect to January
2002 reverse stock split) (Incorporated by reference to Exhibit
10.54 to EasyLink Services Corporation's Annual Report on Form 10-K
filed March 30, 2004)
10.15.8 Warrant dated November 27, 2001 issued to George Abi Zeid to
purchase 268,297 shares of Class A common stock at an exercise price
of $6.10 per share (after giving effect to January 2002 reverse
stock split) (Incorporated by reference to Exhibit 10.55 to EasyLink
Services Corporation's Annual Report on Form 10-K filed March 30,
2004)
10.15.9 Warrant dated November 27, 2001 issued to Fleet Business Credit, LLC
to purchase 663,172 shares of Class A common stock at an
66
exercise price of $6.10 per share (after giving effect to January
2002 reverse stock split) (Incorporated by reference to Exhibit
10.56 to EasyLink Services Corporation's Annual Report on Form 10-K
filed March 30, 2004)
10.16 Deferred Stock Unit Agreement (Incorporated by reference to Exhibit
10.1 of EasyLink Services Corporation's Current Report on Form 8-K
filed August 7, 2006)
10.17 Restricted Unit Agreement (Incorporated by reference to Exhibit 10.2
of EasyLink Services Corporation's Current Report on Form 8-K filed
August 7, 2006)
10.18 Restricted Stock Agreement (Incorporated by reference to Exhibit
10.3 of EasyLink Services Corporation's Current Report on Form 8-K
filed August 7, 2006)
10.19+ Common Stock Purchase Agreement dated as of April 13, 2006 between
EasyLink Services Corporation and the investors named therein
(Incorporated by reference to Exhibit 10.1 of EasyLink Services
Corporation's Quarterly Report on Form 10-Q filed May 15, 2006)
10.20 Registration Rights Agreement dated as of April 13, 2006 between
EasyLink Services Corporation and the investors named therein
(Incorporated by reference to Exhibit 10.2 of EasyLink Services
Corporation's Quarterly Report on Form 10-Q filed May 15, 2006)
10.21 Contract of Sale and Security Agreement dated for purposes of
reference July 20, 2006 between EasyLink Services Corporation,
EasyLink Services USA, Inc. and CAPCO Financial Company, a division
of Greater Bay Bank N.A. (Incorporated by reference to Exhibit 10.1
of EasyLink Services Corporation's Current Report on Form 8-K filed
August 2, 2006)
10.22 Form of Executive Severance agreement entered into on June 22, 2006
with certain members of management (Incorporated by reference to
Exhibit 10.3 of EasyLink Services Corporation's Current Report on
Form 8-K filed June 22, 2006)
21 Subsidiaries of EasyLink Services Corporation
23 Consents:
23.1 Consent of KPMG LLP
23.2 Consent of Grant Thornton LLP
31 Certifications
31.1 Certification of Principal Executive Officer pursuant to Section 302
of the Sarbanes-Oxley Act of 2002
31.2 Certification of Principal Financial Officer pursuant to Section 302
of the Sarbanes-Oxley Act of 2002
32.1 Certification of Principal Executive Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
32.2 Certification of Principal Financial Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
* Confidential treatment granted.
** Confidential treatment requested
67
+ Disclosure schedules and other attachments are omitted, but will be
furnished supplementally to the Commission upon request.
Financial Statement Schedules
None
68