##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON, DC 20549
 FORM 10-Q
 (Mark One)
 þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
 For the quarterly period ended October 31, 2008
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 For the transition period from  to
 Commission File Number: 000-24996
 
 EasyLink Services International Corporation
  Delaware(State or Other Jurisdiction of Incorporation or Organization)
    
    13-3645702(I.R.S. Employer Identification No.)6025 The Corners Parkway, Suite 100
Norcross, Georgia
(Address of Principal Executive Offices)
    
    30092
(Zip Code)
 (678) 533-8000
 þ o
  Large accelerated filer o
    
    Accelerated filer o
    
    Non-accelerated þ
    
    Smaller reporting company o
 Yes o No þ




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##### 



EASYLINK SERVICES INTERNATIONAL CORPORATION
INDEX TO FORM 10-Q
 PagePART
1 FINANCIAL INFORMATIONItem 1: Financial Statements
    
    
    1Condensed Consolidated Balance Sheets as of October 31, 2008 and July 31, 2008 (Unaudited)
    
    
    1Condensed
Consolidated Statements of Operations for the three months ended October 31, 2008 and 2007 (Unaudited)
    
    
    2Condensed Consolidated Statements of Cash Flows for the three months ended October 31, 2008 and 2007 (Unaudited)
    
    
    3Notes to Condensed Consolidated Financial Statements (Unaudited)
    
    
    4Item 2: Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    9Item 3: Quantitative and Qualitative Disclosures about Market Risk
    
    
    11Item 4T: Controls and Procedures
    
    
    12PART II OTHER INFORMATIONItem 1: Legal Proceedings
    
    
    12Item 1A: Risk Factors
    
    
    12Item 2: Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    12Item 3: Defaults Upon Senior Securities
    
    
    13Item 4: Submission of Matters to a Vote of Security Holders
    
    
    13Item 5: Other Information
    
    
    13Item 6: Exhibits
    
    
    13Signatures
    
    
    14Exhibit 31.1Exhibit 31.2Exhibit 32.1Exhibit 32.2




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##### Table of Contents



PART I. FINANCIAL INFORMATION
 
 Item 1. Financial Statements
 
 Condensed Consolidated Balance Sheets as of October 31, 2008 and July 31, 2008 (Unaudited)
 October 31,
    
    
    July 31,2008
    
    
    2008ASSETSCurrent assets:Cash and cash equivalents
    
    $
    19,442,868
    
    
    $
    32,091,005Accounts receivable, net
    
    
    12,995,147
    
    
    
    13,575,782Prepaid expenses and other current assets
    
    
    4,617,714
    
    
    
    5,414,192Total current assets
    
    
    37,055,729
    
    
    
    51,080,979Property and equipment, net
    
    
    9,693,329
    
    
    
    8,551,927Goodwill
    
    
    40,064,741
    
    
    
    40,209,960Other intangible assets, net (See Note 2)
    
    
    26,815,213
    
    
    
    27,742,466Tax asset
    
    
    3,152,597
    
    
    
    3,343,778Other assets
    
    
    670,471
    
    
    
    595,689Total assets
    
    $
    117,452,080
    
    
    $
    131,524,799LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    2,004,649
    
    
    $
    2,820,744Notes payable
    
    
    14,516,287
    
    
    
    7,052,313Accrued expenses
    
    
    8,550,521
    
    
    
    10,683,206Other current liabilities
    
    
    1,617,542
    
    
    
    1,861,869Total current liabilities
    
    
    26,688,999
    
    
    
    22,418,132Long term debt (See Note 3)
    
    
    35,442,368
    
    
    
    47,497,402Other liabilities
    
    
    923,768
    
    
    
    1,005,505Total liabilities
    
    
    63,055,135
    
    
    
    70,921,039Commitments and contingencies (See Note 7)Stockholders Equity:Series C Preferred Stock  par value $.01
per share, 44.76 votes per share; 5,000
and 5,000 shares issued and outstanding,
respectively (liquidation value of
$5,166,667 at October 2008 and $5,116,393
at July 2008)
    
    
    50
    
    
    
    50Common stock:Class A  par value $.01 per share,
300,000,000 shares authorized, one vote
per share; 25,150,243 issued and
24,404,393 outstanding for October 2008
and 25,125,088 issued and 25,015,838
outstanding for July 2008, respectively
    
    
    251,502
    
    
    
    251,251Additional paid-in capital
    
    
    125,726,264
    
    
    
    125,457,794Treasury stock  745,850 shares as of
October 31, 2008 and 109,250 shares as of
July 31, 2008
    
    
    (1,626,359
    )
    
    
    (303,325
    )Accumulated other comprehensive loss
    
    
    (1,883,089
    )
    
    
    (1,063,266
    )Accumulated deficit
    
    
    (68,071,423
    )
    
    
    (63,738,744
    )Total stockholders equity
    
    
    54,396,945
    
    
    
    60,603,760Total liabilities and stockholders equity
    
    $
    117,452,080
    
    
    $
    131,524,799
   1




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##### Table of Contents



Condensed Consolidated Statements of Operations for the three months ended October 31, 2008 and 2007
(Unaudited)
 Three Months EndedOctober 31,2008
    
    
    2007Service revenue
    
    $
    22,814,946
    
    
    $
    20,985,867Cost of services
    
    
    6,719,145
    
    
    
    6,004,902Gross profit
    
    
    16,095,801
    
    
    
    14,980,965Operating expenses:Product development and enhancement
    
    
    2,122,465
    
    
    
    2,032,681Selling and marketing
    
    
    3,565,644
    
    
    
    2,382,618General and administrative
    
    
    9,358,027
    
    
    
    7,201,107Operating income
    
    
    1,049,665
    
    
    
    3,364,559Other income (expense):Interest and investment income
    
    
    129,575
    
    
    
    154,095Interest expense
    
    
    (5,117,229
    )
    
    
    (5,003,568
    )Equity in losses of investment
    
    
    
    
    
    
    (930,269
    )Other income
    
    
    61,707
    
    
    
    231,280(4,925,947
    )
    
    
    (5,548,462
    )Loss before income taxes
    
    
    (3,876,282
    )
    
    
    (2,183,903
    )Provision (Benefit) for income taxes
    
    
    452,352
    
    
    
    (172,140
    )Net loss
    
    
    (4,332,634
    )
    
    
    (2,011,763
    )Dividends on preferred stock
    
    
    (50,273
    )
    
    
    (50,411
    )Net loss attributable to common stockholders
    
    $
    (4,382,907
    )
    
    $
    (2,062,174
    )Basic loss per common share
    
    $
    (0.18
    )
    
    $
    (0.09
    )Diluted loss per common share
    
    $
    (0.18
    )
    
    $
    (0.09
    )Anti-dilutive stock options, warrants, Series A and Series B
Convertible Notes and Series C preferred stock
    
    
    26,715,721
    
    
    
    25,021,712Weighted average number of common shares outstanding  basic
    
    
    24,910,294
    
    
    
    23,296,627Weighted average number of common shares outstanding  diluted
    
    
    24,910,294
    
    
    
    23,296,627
   2




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Condensed Consolidated Statements of Cash Flows for the three months ended October 31, 2008 and 2007
(Unaudited)
 Three Months Ended October 31,2008
    
    
    2007Cash flows from operating activities:Net income (loss)
    
    $
    (4,332,634
    )
    
    $
    (2,011,763
    )Adjustments to reconcile net income to net cash provided by operating activities:Depreciation and amortization
    
    
    2,127,978
    
    
    
    1,889,694Bad debt expense
    
    
    311,880
    
    
    
    162,367Amortization of discount and other non-cash interest expense
    
    
    2,217,785
    
    
    
    3,490,791Non-cash charges for equity instruments issued for compensation and services
    
    
    316,733
    
    
    
    113,331Non-cash equity in losses of investment and other non-cash items
    
    
    (57,329
    )
    
    
    929,910Changes in assets and liabilities, net of effects from acquisition:Accounts receivable
    
    
    (250,987
    )
    
    
    (31,027
    )Prepaid expenses and other assets
    
    
    906,967
    
    
    
    788,431Accounts payable
    
    
    (726,213
    )
    
    
    (419,464
    )Accrued expenses
    
    
    (1,812,440
    )
    
    
    (4,615,376
    )Deferred revenue and other liabilities
    
    
    96,815
    
    
    
    (607,560
    )Net cash used in operating activities
    
    
    (1,201,445
    )
    
    
    (310,666
    )Cash flows from investing activities:Payment for purchase of acquisitions, net of cash acquired
    
    
    
    
    
    
    (54,537,388
    )Purchases of intellectual property and equipment
    
    
    (2,435,873
    )
    
    
    (145,714
    )Other
    
    
    
    
    
    
    17,877Net cash used in investing activities
    
    
    (2,435,873
    )
    
    
    (54,665,225
    )Cash flows from financing activities:Proceeds from sale of stock and exercise of options and warrants
    
    
    2,261
    
    
    
    5,341,885Purchase of treasury stock
    
    
    (1,323,034
    )
    
    
    Net (repayments) borrowings
    
    
    (6,808,845
    )
    
    
    59,789,540Net cash (used in) provided by financing activities
    
    
    (8,129,618
    )
    
    
    65,131,425Effect of foreign exchange rate changes on cash and cash equivalents
    
    
    (881,201
    )
    
    
    (204,640
    )Net (decrease) increase in cash and cash equivalents
    
    
    (12,648,137
    )
    
    
    9,950,894Cash and cash equivalents, beginning of period
    
    
    32,091,005
    
    
    
    5,444,176Cash and cash equivalents, end of period
    
    $
    19,442,868
    
    
    $
    15,395,070
   3




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##### Table of Contents



EASYLINK SERVICES INTERNATIONAL CORPORATION
 
 Notes to Condensed Consolidated Financial Statements (Unaudited)
 1. BASIS OF PRESENTATION
    Principles of consolidation and basis of presentation
  Recently adopted accounting pronouncements
 Fair Value
Measurements Effective Date of FASB Statement No. 157
 The Fair Value Option for Financial Assets and Liabilities
 Noncontrolling Interests in Consolidated Financial Statements, an
Amendment to ARB No. 51
 Recent accounting pronouncements not yet adopted
 Disclosures about Derivative Instruments and
Hedging Activities, an amendment of FASB Statement No. 133 Accounting for Derivative Instruments and
Hedging Activities
  4




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##### Table of Contents



The Hierarchy of Generally Accepted Accounting
Principles. The Meaning of Present Fairly in Conformity With Generally Accepted Accounting Principles.
 2. ACQUIRED INTANGIBLE ASSETS
  Weighted averageamortizationperiod (years)
    
    
    October 31, 2008
    
    
    July 31, 2008Purchased customer relationships
    
    
    6  8
    
    
    $
    15,974,651
    
    
    $
    16,634,932Internally developed systems
    
    
    4
    
    
    
    7,044,054
    
    
    
    7,752,097Tradenames
    
    
    <1
    
    
    
    3,796,508
    
    
    
    3,355,437Intangible assets, net
    
    
    
    
    
    $
    26,815,213
    
    
    $
    27,742,466
   3. INDEBTEDNESS
   October 31, 2008
    
    
    July 31, 2008York Select Unit Trust
    
    $
    8,439,544
    
    
    $
    9,347,390York Credit Opportunities Fund, L.P.
    
    
    20,043,914
    
    
    
    22,200,048York Investment Limited
    
    
    21,098,857
    
    
    
    23,368,472York Capital Management, L.P.
    
    
    6,540,645
    
    
    
    7,244,226York Select, L.P.
    
    
    7,173,611
    
    
    
    7,945,280Capitalized leases
    
    
    20,621
    
    
    
    20,251Subtotal
    
    
    63,317,192
    
    
    
    70,125,667Less debt discount
    
    
    13,358,537
    
    
    
    15,575,952Less current portion of long term debt
    
    
    14,516,287
    
    
    
    7,052,313Long term debt and capital leases
    
    $
    35,442,368
    
    
    $
    47,497,402
  5




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##### Table of Contents



Twelve months ending October 31,
    
    Amount2009
    
    $
    19,009,5922010
    
    $
    25,318,6292011
    
    $
    18,988,971
 4. STOCKHOLDERS EQUITY
 Dividends
   Share Repurchases
  MaximumTotal
    
    
    
    
    
    
    Total Number of
    
    
    Number of SharesNumber of
    
    
    Average
    
    
    Shares Purchased
    
    
    that May Yet beShares
    
    
    Price Paid
    
    
    as Part of Publicly
    
    
    Purchased UnderPeriod
    
    Purchased
    
    
    per Share
    
    
    Announced Plan
    
    
    the PlanBalance as of July
31, 2008
    
    
    109,250
    
    
    $
    2.78
    
    
    
    109,250
    
    
    
    890,750August 1 to 31
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    890,750September 1 to 30
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    890,750October 1 to 31
    
    
    636,600
    
    
    $
    2.18
    
    
    
    636,600
    
    
    
    254,150Total
    
    
    745,850
    
    
    $
    2.27
    
    
    
    745,850
    
    
    
    254,150
 5. INCOME TAXES
  Accounting for Uncertainty in Income Taxes
  6




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##### Table of Contents



6. FAIR VALUE REPORTING
  
    
    Level 1  Observable inputs such as quoted prices in active market;
    
    Level 2  Inputs, other than the quoted prices in active markets, that
are observable either directly or indirectly; and
    
    Level 3  Unobservable inputs in which there is little or no market
data, which require the reporting entity to develop its own
assumptions.
  Quoted Prices inActive Markets for
    
    
    SignificantIdentical Assets
    
    
    Other
    
    
    Significant(Liabilities)
    
    
    Observable
    
    
    Unobservable(Level 1)
    
    
    Inputs (Level 2)
    
    
    Inputs (Level 3)
    
    
    Carrying AmountCash Equivalents
    
    $
    13,001,118
    
    
    
    
    
    
    
    
    
    
    $
    13,001,118Available for sale
Securities
    
    
    59,976
    
    
    
    
    
    
    
    
    
    
    
    59,976$
    13,061,094
    
    
    
    
    
    
    
    
    
    
    $
    13,061,094
  7. COMMITMENTS AND CONTINGENCIES
 New York State Sales Tax Assessment
    7




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##### Table of Contents



Litigation
    Accounting for Contingencies,
 8.
    
    INTERIM SEGMENT DISCLOSURES
  
    
    Supply Chain Messaging Segment (Supply Chain), which includes all our EDI and
telex services. This segment was 51% and 55% of reported revenue for the quarters
ending October 31, 2008 and 2007, respectively.
    
    On Demand Messaging Segment (On Demand), which includes all fax, e-mail, document
capture and management (DCM) and workflow services. This segment was 49% and 45% of
reported revenue for the quarters ending October 31, 2008 and 2007, respectively.
  Supply Chain
    
    
    On Demand
    
    
    TotalQuarter Ended October 31, 2008Revenue from external customers
    
    $
    11,615,074
    
    
    $
    11,199,872
    
    
    $
    22,814,946Segment gross profit
    
    $
    8,474,445
    
    
    $
    7,621,356
    
    
    $
    16,095,801
  Segment gross profit
    
    $
    16,095,801Corporate expenses
    
    
    15,046,136Operating income
    
    
    1,049,665Other income (expense), net
    
    
    (4,925,947
    )Income before income taxes
    
    
    (3,876,282
    )Income tax
expense
    
    
    456,352Net income
    
    $
    (4,332,634
    )
 Supply Chain
    
    
    On Demand
    
    
    TotalQuarter Ended October 31, 2007Revenue from external customers
    
    $
    11,520,235
    
    
    
    9,465,632
    
    
    $
    20,985,867Segment gross profit
    
    $
    8,538,081
    
    
    
    6,442,884
    
    
    $
    14,980,965
  Segment gross profit
    
    $
    14,980,965Corporate expenses
    
    
    11,616,406Operating income
    
    
    3,364,559Other income (expense), net
    
    
    (5,548,462
    )Income before income taxes
    
    
    (2,183,903
    )Income tax
benefit
    
    
    (172,140
    )Net income
    
    $
    (2,011,763
    )
  8




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##### Table of Contents



Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
   Critical Accounting Policies and Significant Use of Estimates in Financial Statements
    9




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Three Months Ended October 31, 2008 Compared with the Three Months Ended October 31, 2007  Results of Operations
  Three Months Ended October 31,2008
    
    
    2007
    
    
    VarianceRevenue:Supply Chain MessagingEDI Services
    
    $
    8,920,358
    
    
    $
    9,059,153
    
    
    $
    (138,795
    )Telex Services
    
    
    2,694,716
    
    
    
    2,461,082
    
    
    
    233,634Total Supply Chain Messaging
    
    
    11,615,074
    
    
    
    11,520,235
    
    
    
    94,839On Demand MessagingFax Services
    
    
    9,113,505
    
    
    
    7,457,460
    
    
    
    1,656,045DCM Services
    
    
    743,529
    
    
    
    674,107
    
    
    
    69,422Other Services
    
    
    1,342,838
    
    
    
    1,334,065
    
    
    
    8,773Total On Demand Messaging
    
    
    11,199,872
    
    
    
    9,465,632
    
    
    
    1,734,240Total Revenue:
    
    
    22,814,946
    
    
    
    20,985,867
    
    
    
    1,829,079Cost of Revenue:Supply Chain Messaging
    
    
    3,140,629
    
    
    
    2,982,154
    
    
    
    158,475On Demand Messaging
    
    
    3,578,516
    
    
    
    3,022,748
    
    
    
    555,768Total Cost of Revenue
    
    
    6,719,145
    
    
    
    6,004,902
    
    
    
    714,243Gross Margin:Supply Chain Messaging
    
    
    8,474,445
    
    
    
    8,538,081
    
    
    
    (63,636
    )On Demand Messaging
    
    
    7,621,356
    
    
    
    6,442,884
    
    
    
    1,178,472Total Gross Margin
    
    
    16,095,801
    
    
    
    14,980,965
    
    
    
    1,114,836Product Development and Enhancement
    
    
    2,122,465
    
    
    
    2,032,681
    
    
    
    89,784Selling and Marketing
    
    
    3,565,644
    
    
    
    2,382,618
    
    
    
    1,183,026General and Administrative
    
    
    9,358,027
    
    
    
    7,201,107
    
    
    
    2,156,920Total product, selling and G&A expenses
    
    
    15,046,136
    
    
    
    11,616,406
    
    
    
    3,429,730Other (expense) income
    
    
    (4,925,947
    )
    
    
    (5,548,462
    )
    
    
    622,515Income (loss) before income taxes
    
    $
    (3,876,282
    )
    
    $
    (2,183,903
    )
    
    $
    (1,692,379
    )
    10




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##### Table of Contents



Liquidity and Capital Resources
  Off-Balance Sheet Arrangements
   11




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##### Table of Contents



Tabular Disclosure of Contractual Obligations
  Payment due by periodLess than
    
    
    1-3
    
    
    3-5
    
    
    More thanContractual Obligations
    
    Total
    
    
    1 year
    
    
    years
    
    
    years
    
    
    5 yearsOperating Lease
Obligations
    
    $
    14,369,519
    
    
    $
    2,992,866
    
    
    $
    5,493,988
    
    
    $
    4,182,884
    
    
    $
    1,699,781Telecomm commitments
    
    
    3,616,750
    
    
    
    1,905,150
    
    
    
    1,711,600
    
    
    
    
    
    
    
    Series A and B Notes
    
    
    63,296,571
    
    
    
    18,988,971
    
    
    
    44,307,600
    
    
    
    
    
    
    
    Total
    
    $
    81,282,840
    
    
    $
    23,886,987
    
    
    $
    51,513,188
    
    
    $
    4,182,884
    
    
    $
    1,699,781
 
 Item 3. Quantitative and Qualitative Disclosures About Market Risk
   Accounting for Certain Investments in Debt
and Equity Securities
 
 Item 4T. Controls and Procedures
 Disclosure Controls and Procedures
  Internal Controls
   12




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##### Table of Contents



PART II. OTHER INFORMATION
 
 Item 1. Legal Proceedings
  
 Item 1A. Risk Factors
  Our business is being affected by the global economic slowdown and the rapid changes in
foreign exchange rates
 
 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
  
 Item 3. Defaults Upon Senior Securities
  
 Item 4. Submission of Matters to a Vote of Security Holders
  
 Item 5. Other Information
  
 Item 6. Exhibits
 31.1
    
    Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.31.2
    
    Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.32.1
    
    Certification of the Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.32.2
    
    Certification of the Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
  13




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##### Table of Contents



SIGNATURES
   EASYLINK SERVICES INTERNATIONAL CORPORATIONBy:
    /s/ Glen E. ShipleyGlen E. ShipleyChief Financial Officer  14




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##### Table of Contents



EXHIBIT INDEX
 Exhibits
    
    Description31.1
    
    
    Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.31.2
    
    
    Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.32.1
    
    
    Certification of the Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.32.2
    
    
    Certification of the Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
  15