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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON. D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2002
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER: 0-25965
J2 GLOBAL COMMUNICATIONS, INC.
------------------------------------------------------
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 51-0371142
- ------------------------------- ----------------
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER)
6922 HOLLYWOOD BOULEVARD
SUITE 800
HOLLYWOOD, CALIFORNIA 90028
----------------------------------------
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
(323) 860-9200
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(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
Indicate by check mark whether the registrant (1) has filed all reports
required 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 [ ]
As of August 1, 2002, there were 10,820,418 shares of the Registrant's
common stock, $0.01 per share, outstanding.
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J2 GLOBAL COMMUNICATIONS, INC.
FOR THE QUARTER ENDED JUNE 30, 2002
INDEX
PAGE
PART I. FINANCIAL INFORMATION ----
Item 1. Condensed Consolidated Financial Statements (Unaudited)
Condensed Consolidated Statements of Operations.............. 3
Condensed Consolidated Balance Sheets........................ 4
Condensed Consolidated Statements of Cash Flows.............. 5
Notes to Condensed Consolidated Financial Statements......... 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.......................... 8
Item 3. Quantitative and Qualitative Disclosures about Market Risk... 14
PART II. OTHER INFORMATION
Item 1. Legal Proceedings............................................ 14
Item 2. Changes in Securities and Use of Proceeds.................... 14
Item 3. Defaults Upon Senior Securities.............................. 14
Item 4. Submission of Matters to a Vote of Security Holders......... 14
Item 5. Other Information............................................ 15
Item 6. Exhibits and Reports on Form 8-K............................. 15
2
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
J2 GLOBAL COMMUNICATIONS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
----------------------------- -----------------------------
2002 2001 2002 2001
------------ ------------ ------------ ------------
Revenues
Subscriber $ 10,427 $ 7,290 $ 19,797 $ 13,117
Advertising 705 247 1,532 589
Licensed services and other 174 326 357 1,369
------------ ------------ ------------ ------------
Total revenue 11,306 7,863 21,686 15,075
Cost of revenue 2,701 3,063 6,142 6,568
------------ ------------ ------------ ------------
Gross profit 8,605 4,800 15,544 8,507
Operating expenses:
Sales and marketing 1,434 1,003 2,731 2,187
Research and development 744 647 1,532 1,181
General and administrative 3,341 3,502 6,660 7,219
Amortization of goodwill and other intangibles -- 1,734 112 3,470
------------ ------------ ------------ ------------
Total operating expenses 5,519 6,886 11,035 14,057
Operating earnings (loss) 3,086 (2,086) 4,509 (5,550)
Other income, net 232 377 325 801
------------ ------------ ------------ ------------
Earnings (loss) before income taxes and cumulative
effect of change in accounting principle 3,318 (1,709) 4,834 (4,749)
Income tax expense -- -- -- --
------------ ------------ ------------ ------------
Earnings (loss) before cumulative effect of change
in accounting principle 3,318 (1,709) 4,834 (4,749)
Cumulative effect of change in accounting principle -- -- 225 --
------------ ------------ ------------ ------------
Net earnings (loss) $ 3,318 $ (1,709) $ 5,059 (4,749)
============ ============ ============ ============
Basic net earnings (loss) per share $ 0.31 $ (0.15) $ 0.47 $ (0.41)
============ ============ ============ ============
Diluted net earnings (loss) per share $ 0.28 $ (0.15) $ 0.44 $ (0.41)
============ ============ ============ ============
Basic weighted average shares outstanding 10,757,212 11,483,292 10,743,383 11,498,434
============ ============ ============ ============
Diluted weighted average shares outstanding 11,814,344 11,483,292 11,527,657 11,498,434
============ ============ ============ ============
3
J2 GLOBAL COMMUNICATIONS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(IN THOUSANDS)
JUNE 30, 2002 DECEMBER 31, 2001
------------ ------------
ASSETS
Cash and cash equivalents $ 23,444 $ 19,087
Accounts receivable, net 4,021 3,615
Prepaid expenses and other 1,063 1,298
------------ ------------
Total current assets 28,528 24,000
Furniture, fixtures and equipment, net 6,335 6,066
Goodwill and other purchased intangibles, net 17,814 17,746
Other assets 1,151 1,244
------------ ------------
TOTAL ASSETS $ 53,828 $ 49,056
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable and accrued expenses $ 4,587 $ 5,827
Deferred revenue 1,802 1,406
Current portion of long-term debt 542 655
------------ ------------
Total current liabilities 6,931 7,888
Long-term debt 125 28
------------ ------------
Total liabilities 7,056 7,916
Total stockholders' equity 46,772 41,140
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 53,828 $ 49,056
============ ============
4
J2 GLOBAL COMMUNICATIONS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(in thousands)
SIX MONTHS ENDED JUNE 30,
------------------------------
2002 2001
------------ ------------
Net cash provided by (used in) operating activities $ 5,398 $ (1,364)
------------ ------------
Cash flows from investing activities:
Proceeds from sale of investment 169 --
Redemption of investments, net -- 2,289
Repayments of notes receivable 159 --
Purchase of furniture, fixtures and equipment (1,297) (946)
------------ ------------
Net cash provided by (used in) investing activities (969) 1,343
------------ ------------
Cash flows from financing activities:
Purchase of redeemable common stock -- (911)
Exercise of stock options 487 --
Repayments of long-term debt, net (559) (856)
------------ ------------
Net cash used in financing activities (72) (1,767)
------------ ------------
Net increase (decrease) in cash and cash equivalents 4,357 (1,788)
Cash and cash equivalents, beginning of year 19,087 23,824
------------ ------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 23,444 $ 22,036
============ ============
5
J2 GLOBAL COMMUNICATIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2002
(Unaudited)
NOTE 1 - THE COMPANY AND BASIS OF PRESENTATION
j2 Global Communications, Inc. (formerly known as JFAX.COM, Inc.) ("j2
Global" or the "Company") provides outsourced value-added messaging and
communications services to individuals and businesses throughout the world. The
Company, a Delaware corporation, was formed in 1995 and began offering its
services commercially in 1996.
The accompanying financial information is unaudited but reflects all
adjustments (consisting only of normal recurring adjustments) that are, in the
opinion of management, necessary for a fair presentation of the consolidated
financial position and results of operations for the interim periods. The
condensed consolidated financial statements should be read in conjunction with
the consolidated financial statements and notes thereto, together with
management's discussion and analysis of financial condition and results of
operations, for the fiscal year ended December 31, 2001 as presented in the
Company's annual report on form 10-K, as amended on April 29, 2002. The results
of operations for the three and six months ended June 30, 2002 are not
necessarily indicative of the results to be expected for the entire fiscal year.
NOTE 2 - USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
6
NOTE 3 - RECENT ACCOUNTING STANDARDS
In June 2001, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 142, "Goodwill and Other
Intangible Assets". The Company completed the adoption of SFAS No. 142 during
the first quarter of 2002. As required by SFAS No. 142, the Company discontinued
amortizing the remaining balances of goodwill of $15.9 million and a tradename
of $1.3 million. All remaining and future acquired goodwill and intangible
assets with indefinite useful lives will be subject to impairment tests
annually, or earlier if indicators of potential impairment exist, using a
fair-value-based approach. In conjunction with the implementation of SFAS No.
142, during the first quarter of 2002 the Company completed the required
impairment review and found no impairment in goodwill or in the tradename.
SFAS No. 142 also requires that the amount of any unamortized deferred
credit from a business combination effected prior to July 1, 2001 be recognized
into income as the cumulative effect of a change in accounting principle. As of
January 1, 2002, the Company had an unamortized deferred credit of $225,000
related to such a business combination. The Company recognized such amount in
the accompanying statement of operations.
As of June 30 and March 31, 2002, the Company had one identifiable
intangible asset subject to amortization. This asset relates to the purchase of
a technology license and has an estimated useful life of eight years. As of June
30, 2002, the license had a gross carrying amount, accumulated amortization, and
a net carrying amount of $600,000, $49,000 and $551,000, respectively. Yearly
amortization expense for the next five years will be $75,000 per year.
Pro Forma Information - FAS 142 Transitional Disclosure
- -------------------------------------------------------
For the three and six months ended June 30, 2002 and 2001, a reconciliation
of previously reported net loss to the amounts adjusted for the exclusion of
goodwill and amortization of a tradename amd a cumulative effect of a change in
accounting principle is as follows (in thousands, except per share amounts):
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
------------------------- -------------------------
2002 2001 2002 2001
---------- ---------- ---------- ----------
Reported net income (loss) 3,318 (1,709) 5,059 (4,749)
Add - Amortization of goodwill and a tradename -- 1,734 112 3,470
Less - Cumulative effect of change in
accounting principle -- -- (225) --
---------- ---------- ---------- ----------
Adjusted net income (loss) 3,318 25 4,946 (1,279)
========== ========== ========== ==========
Basic net income (loss) per share-as reported $ 0.31 $ (0.15) $ 0.47 $ (0.41)
Basic net income (loss) per share-as adjusted $ 0.31 $ 0.00 $ 0.46 $ (0.11)
Diluted net income (loss) per share-as reported $ 0.28 $ (0.15) $ 0.44 $ (0.41)
Diluted net income (loss) per share-as adjusted $ 0.28 $ 0.00 $ 0.43 $ (0.11)
NOTE 4 - INCOME PER SHARE
Basic net income per share is computed using the weighted average number of
common shares outstanding during the period. For the three and six months ended
June 30, 2002, diluted net income per share includes the effect of options and
warrants to purchase 1,057,132 and 784,274 shares, respectively. For the three
7
and six months ended June 30, 2001, diluted net income per share excludes the
effect of options and warrants to purchase 63,666 and 31,152 shares,
respectively, because their effect would be anti-dilutive.
The following table reconciles per share data for net earnings (loss)
before the cumulative effect of a change in accounting principle to net earnings
(loss) after such change:
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
----------------------------- -----------------------------
2002 2001 2002 2001
------------ ------------ ------------ ------------
Net income (loss) per share-basic
Net income (loss) before cumulative effect of a
change in accounting principle $ 0.31 $ (0.15) $ 0.47 $ (0.41)
Cumulative effect of a change in accounting principle $ -- $ -- $ 0.02 $ --
------------ ------------ ------------ ------------
Net income (loss) per share-basic $ 0.31 $ (0.15) $ 0.49 $ (0.41)
============ ============ ============ ============
Net income (loss) per share-diluted
Net income (loss) before cumulative effect of a
change in accounting principle $ 0.28 $ (0.15) $ 0.44 $ (0.41)
Cumulative effect of a change in accounting principle $ -- $ -- $ 0.02 $ --
------------ ------------ ------------ ------------
Net income (loss) per share-diluted $ 0.28 $ (0.15) $ 0.46 $ (0.41)
============ ============ ============ ============
Shares used in per share calculation-basic 10,757,212 11,483,292 10,743,383 11,498,434
Shares used in per share calculation-diluted 11,814,344 11,483,292 11,527,657 11,498,434
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
DESCRIPTION OF BUSINESS
j2 Global Communications, Inc. ("j2 Global", "Our" or "We") provides
outsourced value-added messaging and communications services to individuals and
businesses throughout the world. We offer Internet fax and voicemail services,
Web-initiated voice conference calling services, electronic document management
solutions, and unified communications services. We market our services
principally under the brand names "eFax", "j2", and "jConnect".
We deliver our services through our global telephony/Internet Protocol
network, which spans more than 800 cities in 18 countries on 5 continents.
We organize our marketing and sales efforts into three distinct channels:
Web, Corporate, and Licensed Services. Each of these channels has a defined
business plan and employs return on investment metrics for analyzing potential
transactions.
8
Our core services each operate in large and distinct markets. These
services are already used by individuals and businesses, however, we offer them
through the use of the Internet and software rather than through traditional
means (e.g. fax machines). Therefore, the challenge is to slightly change
behavior and to educate prospective customers that our solutions are more
secure, efficient, and cost-effective.
We generate a substantial portion of our revenue from customer subscription
and usage fees. We also generate revenue from advertising to non-paying
subscribers (sometimes referred to as j2 Global's "Free" customer base). These
advertising supported subscribers, which are included in our Web Channel, also
serve as a significant source of new paid subscribers as a result of upgrading
their services.
As of June 30, 2002, our Web and Corporate channels had more than 4.5
million and 29,000 telephone numbers deployed, respectively.
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED JUNE 30, 2002 AND 2001
REVENUE. Subscriber revenue, consisting of both the Web and Corporate
channels, was $10.4 million and $7.3 million for the three months ended June 30,
2002 and 2001, respectively. As of both June 30, 2002 and June 30, 2001 we had
more than 4 million telephone numbers deployed to our paid and free subscribers.
The increase in revenue was primarily due to an increased ratio of our paid
subscribers in both our Web and Corporate channels as a percentage of our total
subscriber base.
For the three months ended June 30, 2002 and 2001, our advertising revenue
was $705,000 and $247,000, respectively. The increase in revenue was due
primarily to expanded and more effective efforts to sell to third parties the
right to advertise to our non-paying subscriber base.
For the three months ended June 30, 2002 and 2001, Licensed Services
revenue consisted primarily of royalties from licensing arrangements related to
sales of consumable products to users of existing eFax.com fax machines (which
the Company discontinued selling in early 2001). Licensing revenue declined in
2002 due to the expiration of one of the licensing agreements in effect during
2001 and from expected declining consumable product royalties related to older
eFax.com fax machines being replaced or retired.
For the three months ended June 30, 2002, our Web, Corporate, and Licensed
Services channel revenue represented 73%, 25%, and 2% of our revenues,
respectively. For the comparable period in 2001, our Web, Corporate, and
Licensed Services channel revenue represented 79%, 17%, and 4% of our revenues,
respectively.
COST OF REVENUE. Cost of revenue is primarily related to both subscriber
and advertising revenues and is comprised of data and voice network costs,
customer service expenses, online processing fees, and equipment depreciation.
Cost of revenue was $2.7 million, or 24% of aggregate subscriber and advertising
revenue, and $3.1 million, or 41% of aggregate subscriber and advertising
revenue, for the three months ended June 30, 2002 and 2001, respectively. The
decrease in cost of revenues as a percentage of sales is primarily due to
consolidation of various components of our network infrastructure, increased
network efficiency, and our ability to negotiate reduced costs with several of
our vendors.
We do not expect that the cost of revenue as a percentage of subscriber and
advertising revenue to continue to decrease at the rate experienced for the
three months ended June 30, 2002 compared to the same period in 2001.
OPERATING EXPENSES
SALES AND MARKETING. Sales and marketing costs are primarily related to
both subscriber and advertising revenue. For the three months ended June 30,
2002 and 2001, sales and marketing costs consisted primarily of personnel
related expenses and customer acquisition costs paid to third parties who assist
us in obtaining additional paid and free subscribers. Sales and marketing
expenses were $1.4 million, or 13% of aggregate subscriber and advertising
revenue, and $1.0 million, or 13% of aggregate subscriber and
9
advertising revenue, for the three months ended June 30, 2002 and 2001,
respectively. The dollar increase in sales and marketing costs is primarily due
to additional Corporate sales personnel, increased advertising, and increased
commissions payable to third parties who sell advertising on our behalf and who
assist us in obtaining additional paid and free subscribers. All other sales and
marketing expenses have remained consistent period over period.
RESEARCH AND DEVELOPMENT. Research and development costs were $744,000, or
7% of total revenue, and $647,000, or 8% of total revenue, for the three months
ended June 30, 2002 and 2001, respectively. Research and development costs
primarily consisted of personnel related expenses. The increase from 2001 to
2002 was primarily due to an increase in personnel costs to accommodate
additional security within our infrastructure.
GENERAL AND ADMINISTRATIVE. Our general and administrative costs consist
primarily of personnel related expenses, professional fees, and occupancy costs.
General and administrative costs were $3.3 million, or 30% of total revenue, and
$3.5 million, or 45% of total revenue, for the three months ended June 30, 2002
and 2001, respectively. Expenses were slightly higher in 2001 primarily due to
the additional resources required to integrate eFax.com into j2 Global's
infrastructure and organization. The decline as a percentage of revenue for the
three months ended June 30, 2002 versus 2001 was principally due to increases in
revenue over these comparable periods.
AMORTIZATION OF GOODWILL AND OTHER INTANGIBLES. In June 2001, the Financial
Accounting Standards Board (FASB) issued Statement of Financial Accounting
Standards (SFAS) No. 142, "Goodwill and Other Intangible Assets". Effective the
beginning of first quarter 2002, the Company completed the adoption of SFAS No.
142. As required by SFAS No. 142, the Company discontinued amortizing the
remaining balances of goodwill and a tradename as of the beginning of fiscal
2002. All remaining and future acquired goodwill and intangible assets with
indefinite useful lives will be subject to impairment tests annually, or earlier
if indicators of potential impairment exist, using a fair-value-based approach.
In conjunction with the implementation of SFAS No. 142, as of the beginning of
2002, the Company has completed the required impairment review and found no
impairment in goodwill or in the tradename.
For the three months ended June 30, 2002 and 2001, amortization of goodwill
and other intangibles aggregated to zero and $1.7 million, respectively.
OTHER INCOME, NET. Other income, net, was $232,000 and $377,000 for the
three months ended June 30, 2002 and 2001, respectively. The decrease from 2001
to 2002 was primarily due to decreased interest income earned on our cash
investment balances due to lower interest rates, and discontinuation of income
on a real estate sublease.
RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 2002 AND JUNE 30, 2001
REVENUE. Subscriber revenue, consisting of both the Web and Corporate
channels, was $19.8 million and $13.1 million for the six months ended June 30,
2002 and 2001, respectively. As of both June 30, 2002 and June 30, 2001 we had
more than 4 million telephone numbers deployed to our paid and free subscribers.
The increase in revenue was primarily due to an increased ratio of our paid
subscribers in both our Web and Corporate channels as a percentage of our total
subscriber base.
For the six months ended June 30, 2002 and 2001, our advertising revenue
was $1.5 million and $589,000, respectively. The increase in revenue was due
primarily to expanded and more effective efforts to sell to third parties the
right to advertise to our non-paying subscriber base.
10
For the six months ended June 30, 2002 and 2001, Licensed Service revenue
consisted primarily of royalties from licensing arrangements related to sales of
consumable products to users of existing eFax.com fax machines. On February 15,
2001, we sold, at book value, our remaining consumables inventory to a third
party and simultaneously entered into a royalty based agreement with that party
for future consumable sales. Licensing revenue declined in 2002 due to the
expiration of one of the licensing agreements in effect during 2001 and from
expected declining consumable product royalties related to older eFax.com fax
machines being replaced or retired.
For the six months ended June 30, 2002, our Web, Corporate, and Licensed
Services channel revenue represented 74%, 24%, and 2% of our revenues,
respectively. For the comparable period in 2001, our Web, Corporate, and
Licensed Services channel revenue represented 73%, 18%, and 9% of our revenues
respectively.
COST OF REVENUE. Cost of revenue is primarily related to both subscriber
and advertising revenues and is comprised of data and voice network costs,
customer service expenses, online processing fees, and equipment depreciation.
Cost of revenue was $6.1 million, or 29% of aggregate subscriber and advertising
revenue, and $6.6 million, or 48% of aggregate subscriber and advertising
revenue, for the six months ended June 30, 2002 and 2001, respectively. The
decrease in cost of revenues is primarily due to consolidation of various
components of our network infrastructure, increased network efficiency, and our
ability to negotiate reduced costs with several of our vendors.
We do not expect that the cost of revenue as a percentage of subscriber and
advertising revenue to continue to decrease at the rate experienced for the six
months ended June 30, 2002 compared to the same period in 2001.
OPERATING EXPENSES
SALES AND MARKETING. Sales and marketing costs are primarily related to
both subscriber and advertising revenue. For the six months ended June 30, 2002
and 2001, these costs consisted primarily of personnel related expenses and
customer acquisition costs paid to third parties who assist us in obtaining
additional paid and free subscribers. Sales and marketing expenses were $2.7
million, or 13% of aggregate subscriber and advertising revenue, and $2.2
million, or 16% of aggregate subscriber and advertising revenue, for the six
months ended June 30, 2002 and 2001, respectively. The dollar increase in sales
and marketing costs is primarily due to additional Corporate sales personnel,
increased advertising, and increased commissions payable to third parties who
sell advertising on our behalf and who assist us in obtaining additional paid
and free subscribers. All other sales and marketing expenses have remained
consistent period over period.
RESEARCH AND DEVELOPMENT. Research and development costs were $1.5 million,
or 7% of total revenue, and $1.2 million, or 8% of total revenue, for the six
months ended June 30, 2002 and 2001, respectively. Research and development
costs primarily consisted of personnel related expenses. The increase from 2001
to 2002 was primarily due to an increase in personnel costs to accommodate
additional security within our infrastructure.
GENERAL AND ADMINISTRATIVE. Our general and administrative costs consist
primarily of personnel related expenses, professional fees, and occupancy costs.
General and administrative costs were $6.7 million, or 31% of total revenue, and
$7.2 million, or 48% of total revenue, for the six months ended June 30, 2002
and 2001, respectively. Expenses were higher in 2001 primarily due to the
additional resources required to integrate eFax.com into j2 Global's
infrastructure and organization. The decline as a percentage of revenue for the
three months ended June 30, 2002 versus 2001 was principally due to increases in
revenue over these comparable periods.
AMORTIZATION OF GOODWILL AND OTHER INTANGIBLES. In June 2001, the Financial
Accounting Standards Board (FASB) issued Statement of Financial Accounting
Standards (SFAS) No. 142, "Goodwill and Other Intangible Assets". Effective the
beginning of first quarter 2002, the Company completed the adoption of SFAS No.
142. As required by SFAS No. 142, the Company discontinued amortizing the
remaining balances of goodwill and a tradename as of the beginning of fiscal
2002. All remaining and future acquired goodwill and intangible assets with
indefinite useful lives will be subject to impairment tests annually, or earlier
11
if indicators of potential impairment exist, using a fair-value-based approach.
In conjunction with the implementation of SFAS No. 142, As of the beginning of
2002, the Company has completed the required impairment review and found no
impairment in goodwill or in the tradename.
SFAS No. 142 also requires that the amount of any unamortized deferred
credit from a business combination effected prior to July 1, 2001 be recognized
into income as the effect of a change in accounting principle. As of January 1,
2002, the Company had an unamortized deferred credit of $225,000 related to such
a business combination. The Company recognizes such amount in the accompanying
statement of operations.
For the six months ended June 30, 2002 and 2001, amortization of goodwill
and other intangibles aggregated $112,500 and $3.5 million, respectively.
OTHER INCOME, NET. Other income, net, was $325,000 and $801,000 for the six
months ended June 30, 2002 and 2001, respectively. The decrease from 2001 to
2002 was primarily due to decreased interest income earned on our cash
investment balances due to lower interest rates, and discontinuation of income
on a real estate sublease.
LIQUIDITY AND CAPITAL RESOURCES
As of June 30, 2002 we had $23.4 million in cash and cash equivalents.
Net cash provided by operating activities was $5.4 million for the six
months ended June 30, 2002. This compares to net cash used in operating
activities of $1.4 million for the six months ended June 30, 2001. The increase
in net cash provided by operating activities was primarily due to an increase in
net income before depreciation and amortization.
Net cash used for investing activities was $1.0 million for the six months
ended June 30, 2002. For the comparable period in 2001, net cash provided by
investing activities totaled $1.3 million. Net cash used for the six months
ended June 30, 2002 was comprised of purchases of furniture, fixtures, and
equipment offset by proceeds from the sale of an investment and repayments of
notes receivable. Net cash provided by investing activities for the six months
ended June 30, 2001 was comprised of redemption of investments offset by
purchases of furniture, fixtures, and equipment.
For the six months ended June 30, 2002, net cash used in financing
activities was $72,000, consisting of repayments of long-term debt offset by
exercise of stock options. For the comparable period in 2001, net cash used in
financing activities was $1.8 million, consisting of the purchase of redeemable
common stock and repayment of long-term debt.
We finance a portion of our operating technology equipment and office
equipment through capital leasing and loan arrangements. Amounts due under these
arrangements were $667,000 and $683,000 as of June 30, 2002 and December 31,
2001, respectively.
We currently anticipate that our cash and cash equivalents will be
sufficient to meet our anticipated needs for working capital and capital
expenditures for at least the next 12 months.
FORWARD-LOOKING INFORMATION
We include certain estimates, projections, and other forward-looking
statements in our reports, in quarterly earnings calls and related
presentations, and in other publicly available material. Future performance
cannot be ensured. Actual results may differ materially from those in the
forward-looking statements. Some factors that could cause actual results to
differ include our ability to:
12
o Maintain, expand, and market our Web and Corporate channel customer
bases;
o Successfully maintain our advertising and outbound usage revenues;
o Obtain large quantities of non-paying users on a cost effective basis,
and effectively derive revenues from those users through advertising
to them and selling them paid services;
o Successfully manage our cost structure, including but not limited to
our telecommunication and personnel related expenses;
o On a cost effective basis, retain our current base of telephone
numbers and obtain additional telephone numbers in such quantities and
geographic areas as are necessary to satisfy the demand for our
services;
o Successfully protect our intellectual property and avoid infringing
the proprietary rights of others;
o Compete with other similar providers with regard to price, service,
and functionality;
o Maintain and upgrade our systems and infrastructure to deliver
acceptable levels of service quality and security of customer data and
messages;
o Introduce new services and achieve acceptable levels of return on
investment for those new services; and
o Recruit and retain key personnel.
The words "estimate," "project," "intend," "expect," "believe" and similar
expressions are intended to identify forward-looking statements. Forward-looking
statements are found throughout Management's Discussion and Analysis. The reader
should not place undue reliance on forward-looking statements, which speak only
as of the date of this report. We are not obligated, and undertake no
responsibility, to publicly release any revisions to forward-looking statements
to reflect events after the date of this report or unforeseen events. We provide
a detailed discussion of risk factors in various SEC filings, including our 2001
Form 10-K/A, and you are encouraged to review these filings.
13
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The following discussion of the market risks we face contains
forward-looking statements. Forward-looking statements are subject to risks and
uncertainties. Actual results could differ materially from those discussed in
the forward-looking statements.
We believe that our exposure to market risk related to changes in interest
rates and foreign currency exchange rates is not significant, primarily because
our indebtedness under financing arrangements has fixed interest rates and our
transactions are generally denominated in US dollars. However, we invest our
cash primarily in high grade, short-term, interest-bearing securities. Our
return on these investments is subject to interest rate fluctuations.
We do not have derivative financial instruments for hedging, speculative,
or trading purposes.
PART II.
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
We are not currently aware of any legal proceedings or claims that we
believe are likely to have a material adverse effect on our financial position,
results of operations, or cash flows.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
A. Not applicable
B. Not applicable
C. Not applicable
D. Not applicable
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company held its 2002 Annual Meeting of Shareholders on June 18, 2002.
There were 10,741,185 shares of Company common stock entitled to be voted on the
May 16, 2002 record date for the meeting. The only matter submitted to the
Company's shareholders for a vote at the Annual Meeting was to elect the
following five director nominees to serve for the ensuing year and until their
successors are elected. The votes cast and withheld for such nominees were as
follows:
Nominee For Withheld
------- --- --------
Douglas Y. Bech 9,264,066 23,286
Robert J. Cresci 9,263,558 23,794
Richard S. Ressler 9,186,181 101,171
John F. Rieley 9,263,813 23,539
Michael P. Schulhof 9,263,870 23,482
Based on these voting results, each of the directors nominated was elected.
14
ITEM 5. OTHER INFORMATION
Not applicable
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
A. Exhibits.
Exhibit
Number Description of Exhibit
------ ----------------------
99.1 Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
99.2 Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
B. Reports on Form 8-K
1. On April 23, 2002, j2 Global filed a report on Form 8-K relating to
its financial results and certain other information for the quarter
ended March 31, 2002, and revised financial estimates for the
fiscal year ending December 31, 2002. A copy of j2 Global's press
release announcing the results and other information was attached
and incorporated by reference therein.
2. On April 24, 2002, j2 Global filed a report on Form 8-K (FD)
relating to its April 2002 Investor Presentation disclosed during
j2 Global's first quarter 2002 earnings call. A copy of the April
2002 Investor Presentation was attached and incorporated by
reference therein.
15
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934,
the Registrant has caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
j2 Global Communications, Inc.
(Registrant)
By: /s/ Nehemia Zucker
---------------------------------
Its: Chief Financial and Marketing Officer
(Principal Financial Officer)
By: /s/ Greggory Kalvin
---------------------------------
Its: Vice President of Finance
(Principal Accounting Officer)
Dated: August 13, 2002
16
EXHIBIT INDEX
Exhibit
Number Description of Exhibit
------ ----------------------
99.1 Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
99.2 Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
17