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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 SEPTEMBER 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.
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(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
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(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 November 1, 2002, there were 10,925,926 shares of the Registrant's
common stock, $0.01 per share, outstanding.
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J2 GLOBAL COMMUNICATIONS, INC.
FOR THE QUARTER ENDED SEPTEMBER 30, 2002
INDEX
PAGE
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)........................... 3
Consolidated Statements of Operations...................... 3
Condensed Consolidated Balance Sheets...................... 4
Consolidated Statements of Cash Flows...................... 5
Notes to 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. 15
Item 4. Controls and Procedures.................................... 16
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.......................................... 16
Item 2. Changes in Securities and Use of Proceeds.................. 16
Item 3. Defaults Upon Senior Securities............................ 16
Item 4. Submission of Matters to a Vote Of Security Holders........ 16
Item 5. Other Information.......................................... 16
Item 6. Exhibits and Reports on Form 8-K........................... 17
2
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
J2 GLOBAL COMMUNICATIONS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------------------- -----------------------------
2002 2001 2002 2001
------------ ------------ ------------ ------------
Revenues
Subscriber $ 11,551 $ 7,677 $ 31,349 $ 20,793
Advertising 783 652 2,314 1,241
Licensed services and other 169 268 526 1,638
------------ ------------ ------------ ------------
Total revenue 12,503 8,597 34,189 23,672
Cost of revenue 2,550 3,387 8,692 9,954
------------ ------------ ------------ ------------
Gross profit 9,953 5,210 25,497 13,718
Operating expenses:
Sales and marketing 1,982 1,125 4,713 3,313
Research and development 747 709 2,279 1,890
General and administrative 3,372 3,381 10,032 10,600
Amortization of goodwill and other intangibles -- 1,727 112 5,197
------------ ------------ ------------ ------------
Total operating expenses 6,101 6,942 17,136 21,000
Operating earnings (loss) 3,852 (1,732) 8,361 (7,282)
Other income, net 62 275 387 1,076
------------ ------------ ------------ ------------
Earnings (loss) before income taxes and cumulative
effect of change in accounting principle 3,914 (1,457) 8,748 (6,206)
Income tax expense -- -- -- --
------------ ------------ ------------ ------------
Earnings (loss) before cumulative effect of change
in accounting principle 3,914 (1,457) 8,748 (6,206)
Cumulative effect of change in accounting principle -- -- 225 --
------------ ------------ ------------ ------------
Net earnings (loss) $ 3,914 $ (1,457) $ 8,973 $ (6,206)
============ ============ ============ ============
Basic net earnings (loss) per share $ 0.36 $ (0.13) $ 0.83 $ (0.54)
============ ============ ============ ============
Diluted net earnings (loss) per share $ 0.32 $ (0.13) $ 0.76 $ (0.54)
============ ============ ============ ============
Basic weighted average shares outstanding 10,828,473 11,239,198 10,772,058 11,412,078
============ ============ ============ ============
Diluted weighted average shares outstanding 12,239,737 11,239,198 11,839,788 11,412,078
============ ============ ============ ============
3
J2 GLOBAL COMMUNICATIONS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(IN THOUSANDS)
SEPTEMBER 30, DECEMBER 31,
2002 2001
------------ ------------
ASSETS
Cash and cash equivalents $ 27,440 $ 19,087
Accounts receivable, net 4,681 3,615
Prepaid expenses and other 1,798 1,298
------------ ------------
Total current assets 33,919 24,000
Furniture, fixtures and equipment, net 6,314 6,066
Goodwill and other purchased intangibles, net 17,329 17,746
Other assets 1,106 1,244
------------ ------------
Total assets $ 58,668 $ 49,056
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable and accrued expenses $ 4,470 $ 5,827
Deferred revenue 1,955 1,406
Current portion of long-term debt 1,112 655
------------ ------------
Total current liabilities 7,537 7,888
Long-term debt 161 28
------------ ------------
Total liabilities 7,698 7,916
Total stockholders' equity 50,970 41,140
------------ ------------
Total liabilities and stockholders' equity $ 58,668 $ 49,056
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4
J2 GLOBAL COMMUNICATIONS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
NINE MONTHS ENDED
SEPTEMBER 30
--------------------------
2002 2001
---------- ----------
Cash flows from operating activities:
Net income (loss) $ 8,973 $ (6,206)
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Depreciation and amortization 2,615 7,426
Gain on sale of investment (162) --
Stock based compensation 93 289
Compensation in exchange for note reduction 130 338
Cumulative effect of change in accounting principle (225) --
Decrease (increase) in:
Accounts receivable (1,119) (422)
Interest receivable (28) 140
Prepaid expenses 374 280
Other assets (379) 211
(Decrease) increase in:
Accounts payable (792) (1,857)
Accrued exit costs (100) (1,007)
Deferred revenue 549 (369)
Other current liabilities -- 149
---------- ----------
Net cash provided by (used in) operating activities 9,929 (1,028)
Cash flows from investing activities:
Repayments of note receivable 190 --
Redemption of investments, net -- 4,344
Advances under note receivable -- (500)
Proceeds from sale of an asset 170 --
Purchases of furniture, fixtures and equipment (1,780) (1,179)
---------- ----------
Net cash provided by (used in) investing activities (1,420) 2,665
---------- ----------
Cash flows from financing activities:
Exercise of stock options 798 --
Repurchase of treasury stock -- (394)
Repurchase of redeemable common stock -- (911)
Repayments of long-term debt, net (954) (1,340)
---------- ----------
Net cash used in financing activities (156) (2,645)
---------- ----------
Net increase (decrease) in cash 8,353 (1,008)
Cash and cash equivalents, beginning of year 19,087 23,824
---------- ----------
Cash and cash equivalents, end of period $ 27,440 $ 22,816
========== ==========
5
J2 GLOBAL COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2002
(Unaudited)
NOTE 1 - BASIS OF PRESENTATION
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. These
financial statements should be read in conjunction with the consolidated
financial statements and related notes included in the Company's Annual Report
on Form 10-K/A for the year ended December 31, 2001. The results of operations
for the three and nine months ended September 30, 2002 are not necessarily
indicative of the results to be expected for the final quarter of 2002 or the
entire fiscal year.
NOTE 2 - USE OF ESTIMATES
The preparation of financial statements, in conformity with Generally
Accepted Accounting Principles ("GAAP"), 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. Significant estimates include allowances for doubtful accounts and
deferred income tax valuation, and the valuation of long-lived and intangible
assets and goodwill.
NOTE 3 - INTEGRATION COSTS
In connection with the November 2000 acquisition of eFax.com ("eFax"), the
Company incurred acquisition integration expenses for the incremental cost to
exit and consolidate activities at eFax locations, to involuntarily terminate
certain eFax employees, and for other integration-related activities of eFax
with the Company. GAAP require that these integration expenses, which were not
associated with the generation of future revenues and have no future economic
benefit to the Company, be reflected as assumed liabilities in the allocation of
the purchase price to the net assets acquired.
As of December 31, 2001, acquisition integration liabilities aggregated
$898,000 and are included in accounts payable and accrued expenses in the
accompanying balance sheet. Such amount, which was comprised of $552,000 of
duplicate phone operations costs and $346,000 of occupancy costs, were both
settled in the third quarter of 2002 for an aggregate amount of $232,000. The
$666,000 difference between the settlement cost and the previous estimated
accrual was recorded as a reduction of goodwill in the accompanying balance
sheet.
NOTE 4 - 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 trade name
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 trade name.
6
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 as a
cumulative effect of change in accounting principle in the accompanying
statement of operations.
As of September 30, 2002, the Company had one identifiable intellectual
property intangible asset subject to amortization. This asset has an estimated
useful life of eight years. As of September 30, 2002, such asset had a gross
carrying amount, accumulated amortization, and a net carrying amount of
$800,000, $68,000, and $732,000, respectively.
Pro Forma Information - SFAS 142 Transitional Disclosure
- --------------------------------------------------------
For the three months and nine months ended September 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 is as follows (in
thousands, except per share data).
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------- -------------------------
2002 2001 2002 2001
---------- ---------- ---------- ----------
Reported net earnings (loss) $ 3,914 (1,457) 8,973 (6,206)
Add- Amortization of goodwill and a tradename -- 1,727 -- 5,197
Less-cumulative effect of change in accounting
principle -- -- (225) --
---------- ---------- ---------- ----------
Adjusted net earnings (loss) $ 3,914 270 8,748 (1,009)
========== ========== ========== ==========
Basic net earnings (loss) per share-as reported $ 0.36 (0.13) 0.83 (0.54)
Basic net earnings (loss) per share-as adjusted $ 0.36 0.02 0.81 (0.09)
Diluted net earnings (loss) per share-as reported $ 0.32 (0.13) 0.76 (0.54)
Diluted net earnings (loss) per share-as adjusted $ 0.32 0.02 0.74 (0.09)
NOTE 5 - 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 nine months
ended September 30, 2002, diluted net income per share includes the effect of
options and warrants to purchase 1,411,264 and 1,067,730 shares, respectively,
using the "treasury stock method". For the three and nine months ended September
30, 2001, diluted net income per share excludes the effect of options and
warrants to purchase 90,842 and 30,164 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:
7
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------------------- -----------------------------
2002 2001 2002 2001
------------ ------------ ------------ ------------
Net earnings (loss) per share basic:
Net earnings (loss) before cumulative effect of
a change in accounting principle $ 0.36 (0.13) 0.81 (0.54)
Cumulative effect of a change in accounting principle -- -- 0.02 --
------------ ------------ ------------ ------------
Net earnings (loss) per share basic $ 0.36 (0.13) 0.83 (0.54)
============ ============ ============ ============
Net earnings (loss) per share diluted:
Net earnings (loss) before cumulative effect of
a change in accounting principle $ 0.32 (0.13) 0.74 (0.54)
Cumulative effect of a change in accounting principle -- -- 0.02 --
------------ ------------ ------------ ------------
Net earnings (loss) per share diluted $ 0.32 (0.13) 0.76 (0.54)
============ ============ ============ ============
Shares used in per share calulation-basic 10,828,473 11,239,198 10,772,058 11,412,078
Shares used in per share calulation-diluted 12,239,737 11,239,198 11,839,788 11,412,078
NOTE 6 - INCOME TAXES
As of January 1, 2002, the Company had total federal net operating loss
carryforwards ("NOL") of approximately $115 million. Approximately $65 million
of such amount was obtained through the acquisition of eFax.com in November 2000
and is substantially unusable due to certain "ownership change" provisions of
the Tax Reform Act of 1986. The specifics related to the usability of the
remaining NOL has been under a detailed analysis and review which has not yet
been completed. However, based on all of the factors known as of the date
hereof, the Company believes that enough NOLs are available to offset taxable
income generated to date in 2002. Accordingly, the Company does not believe that
it has a federal or state tax provision for the three and nine months ended
September 30, 2002.
Based on our historical cumulative losses, the uncertainty of future
operating results, the uncertainty regarding any future potential limitations on
our NOLs, and other factors, the Company cannot determine whether it is more
likely than not that it will realize the tax benefits of its NOL and other
deferred tax assets, and accordingly, a full valuation allowance is recorded.
The Company's valuation allowance is reviewed on a quarterly basis based on the
facts and circumstances known at the time.
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 fax and voicemail services,
Web-initiated conference calling services, document management solutions, and
unified messaging 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 950 cities in 18 countries across 5 continents.
We organize our marketing and sales efforts into three distinct channels:
Web, Corporate, and Licensed Services. We have developed a defined business plan
and return-on-investment metrics for analyzing potential transactions in each
channel.
8
Our core services, each of which operates in large and distinct markets,
include fax, voicemail, conference calling, unified communications, and document
management. These are services already used by individuals and businesses.
Therefore, the challenge becomes not one of introducing a radically new service
with uncertain market acceptance, but rather one of educating prospective
customers already using similar services that we offer more secure, efficient,
and cost-effective solutions.
We generate a substantial portion of our revenue from subscribers that pay
through subscription and usage fees. We also generate revenue from advertising
to non-paid subscribers. These advertising-supported subscribers, which are
included in our Web Channel, also serve as a significant source of new paid
subscribers.
As of September 30, 2002, our Web and Corporate channels had more than 4.6
million and 35,500 active telephone numbers deployed, respectively.
Our sales and marketing expenses consist primarily of personnel costs and
payments to third parties for customer acquisitions. Our sales, marketing, and
customer acquisition costs are incurred on both a contingent and non-contingent
basis with respect to the acquisition of a paid or non-paying
advertising-supported customer. We employ return-on-investment metrics to ensure
that targeted parameters are achieved.
DISCUSSION OF CRITICAL ACCOUNTING POLICIES
In the ordinary course of business, we have made a number of estimates and
assumptions relating to the reporting of results of operations and financial
condition in the preparation of its financial statements in conformity with
accounting principles generally accepted in the United States of America
("GAAP"). Actual results could differ significantly from those estimates under
different assumptions and conditions. We believe that the following discussion
addresses our most critical accounting policies, which are those that are most
important to the portrayal of our financial condition and results, and therefore
require management's most difficult, subjective, and complex judgments, often as
a result of the need to make estimates about the effect of matters that are
inherently uncertain.
REVENUE RECOGNITION. Our revenue substantially consists of monthly
recurring and usage based subscription fees. In accordance with GAAP and with
Securities and Exchange Commission ("SEC") issued Staff Accounting Bulletin No.
101, "Revenue Recognition in Financial Statements" which clarifies certain
existing accounting principles for the timing of revenue recognition and
classification of revenues in the financial statements, we defer the portions of
monthly recurring and usage based fees collected in advance and recognize them
in the period earned. Additionally, we defer and recognize subscriber activation
fees and related direct incremental costs over a subscriber's estimated useful
life.
VALUATION OF LONG-LIVED AND INTANGIBLE ASSETS AND GOODWILL. We assess the
impairment of identifiable intangibles, long-lived assets, and related goodwill
and enterprise level goodwill whenever events or changes in circumstances
indicate that the carrying value may not be recoverable. Factors we consider
important which could trigger an impairment review include the following:
o significant underperformance relative to expected historical or
projected future operating results;
o significant changes in the manner of our use of the acquired assets or
the strategy for our overall business;
o significant negative industry or economic trends;
o significant decline in our stock price for a sustained period; and
o our market capitalization relative to net book value.
9
When we determine that the carrying value of intangibles, long-lived
assets and related goodwill and enterprise level goodwill, may not be
recoverable based upon the existence of one or more of the above indicators of
impairment, we measure any impairment based upon a "fair value based" approach
for goodwill and intangible assets and for all other long lived assets, a
"projected discounted cash flow method" using a discount rate determined by our
management to be commensurate with the risk inherent in our current business
model. Net intangible assets, long-lived assets, and goodwill amounted to $23.6
million as of September 30, 2002.
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 the first quarter of 2002, we
completed the adoption of SFAS No. 142. As required by SFAS No. 142, we
discontinued amortizing the remaining balances of goodwill and a trade name as
of the beginning of fiscal 2002. All remaining and future acquired goodwill and
intangible assets with indefinite useful lives are 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, we completed the required impairment review
and found no impairment in goodwill or in the trade name.
VALUATION OF DEFERRED TAX ASSETS. Based on our historical cumulative
losses, the uncertainty of future operating results, the uncertainty regarding
any potential limitations on our NOLs, and other factors, we cannot determine
that it is more likely than not that we will realize the tax benefits of our NOL
and other deferred tax assets for which a full valuation allowance is recorded.
Our valuation allowance is reviewed on a quarterly basis based upon the facts
and circumstances known at the time.
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2002 AND 2001
REVENUES
SUBSCRIBER REVENUE. Subscriber revenue was $11.5 million and $7.7 million
for the three months ended September 30, 2002 and 2001, respectively. The
increase in revenue was primarily due to an increase in our paid subscribers in
both our Web and Corporate channels, and increased revenue per paid subscriber
in both channels.
ADVERTISING. For the three months ended September 30, 2002 and 2001, our
advertising revenue was $783,000 and $652,000, respectively. The increase in
revenue was due primarily to our acquisition of non-paying customers with
demographics believed to be more attractive to advertisers, offset by a
generally weaker advertising market in 2002 versus 2001.
LICENSED SERVICES AND OTHER. For the three months ended September 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 are no longer produced by the Company).
Licensed Services 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 September 30, 2002, our Web, Corporate, and
Licensed Services channel revenue represented 72%, 26%, and 2% of our revenues,
respectively. For the comparable period in 2001, our Web, Corporate, and
Licensed Services channel revenue represented 77%, 19%, and 4% of our revenues,
respectively. The primary reason for the change from 2001 to 2002 was the faster
rate of growth of our Corporate channel in 2002. We expect our Corporate channel
to continue to represent a growing portion of our revenues in the future.
10
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 credit card processing fees, and equipment
depreciation. Cost of revenue was $2.6 million, or 21% of aggregate subscriber
and advertising revenue, and $3.4 million, or 41% of aggregate subscriber and
advertising revenue, for the three months ended September 30, 2002 and 2001,
respectively. The decrease in cost of revenue as a percentage of sales was
primarily due to consolidation of various components of our infrastructure,
increased network efficiency, and our ability to negotiate reduced costs with
several of our vendors. For the remainder of 2002, we do not expect further
material decreases in cost of revenues as a percentage of sales.
SALES AND MARKETING. Sales and marketing costs are primarily related to
both subscriber and advertising revenue. For the three months ended September
30, 2002 and 2001, sales and marketing costs consisted primarily of personnel
related expenses and customer acquisition costs. Sales and marketing expenses
were $2.0 million, or 16% of aggregate subscriber and advertising revenue, and
$1.1 million, or 14% of aggregate subscriber and advertising revenue, for the
three months ended September 30, 2002 and 2001, respectively. The dollar
increase in sales and marketing costs is primarily due to increased marketing
resulting from a more aggressive customer acquisition campaign and additional
selling personnel added to the Corporate channel sales department.
RESEARCH AND DEVELOPMENT. Research and development costs were $747,000, or
6% of total revenue, and $709,000, or 8% of total revenue, for the three months
ended September 30, 2002 and 2001, respectively. Research and development costs
primarily consisted of personnel related expenses. The increase in research and
development costs from 2001 to 2002 was primarily due to an increase in
personnel costs to accommodate our service enhancements, new product development
and to continue to implement additional infrastructure security.
GENERAL AND ADMINISTRATIVE. Our general and administrative costs consist
primarily of personnel related expenses, professional fees, and occupancy costs.
General and administrative costs were $3.4 million, or 27% of total revenue, and
$3.4 million, or 39% of total revenue, for the three months ended September 30,
2002 and 2001, respectively. The decline as a percentage of revenue for the
three months ended September 30, 2002 versus 2001 was principally due to
increases in revenue over these comparable periods versus a stable level of
general and administrative expenses.
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 the first quarter of 2002, we completed the adoption
of SFAS No. 142. As required by SFAS No. 142, we discontinued amortizing the
remaining balances of goodwill and a trade name as of the beginning of fiscal
2002. All remaining and future acquired goodwill and intangible assets with
indefinite useful lives is 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, we completed the required impairment review and found no impairment in
goodwill or in the trade name.
For the three months ended September 30, 2002 and 2001, amortization of
goodwill and other intangibles aggregated zero and $1.7 million, respectively.
11
OTHER INCOME, NET. Other income, net, was $62,000 and $275,000 for the
three months ended September 30, 2002 and 2001, respectively. The decrease in
other income, net from 2001 to 2002 was primarily due to higher interest rates
earned on cash and investments (notwithstanding higher cash and investment
balances in 2002) in 2001 and certain real estate related sublease income in
2001 that was not present in 2002.
INCOME TAXES. As of January 1, 2002, we had total federal net operating
loss carry forwards ("NOL") of approximately $115 million. Approximately $65
million of such amount was obtained through the acquisition of eFax.com in
November 2000 and is substantially unusable due to certain "ownership change"
provisions of the Tax Reform Act of 1986. The specifics related to the usability
of the remaining NOL has been under a detailed analysis and review which has not
yet been completed. However, based on all of the factors known as of the date
hereof, we believe that enough NOLs are available to offset taxable income
generated to date in 2002. Accordingly, we do not believe that we have a federal
or state tax provision for the three months ended September 30, 2002.
Based on our historical cumulative losses, the uncertainty of future
operating results, the uncertainty regarding any potential limitations on our
NOLs, and other factors, we cannot determine whether it is more likely than not
that we will realize the tax benefits of our NOL and other deferred tax
assets, and accordingly, a full valuation allowance is recorded. Our valuation
allowance is reviewed on a quarterly basis based on the facts and circumstances
known at the time.
RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2002
AND SEPTEMBER 30, 2001
REVENUE
SUBSCRIBER. Subscriber revenue was $31.4 million and $20.8 million for the
nine months ended September 30, 2002 and 2001, respectively. The increase in
revenue was primarily due to an increase in our paid subscribers in both our Web
and Corporate channels, and increased revenue per paid subscriber in both
channels.
ADVERTISING. For the nine months ended September 30, 2002 and 2001, our
advertising revenue was $2.3 million and $1.3 million, respectively. The
increase in revenue was due primarily to our acquisition of non-paying customers
with demographics believed to be more attractive to advertisers, offset by a
generally weaker advertising market in 2002 versus 2001.
LICENSED SERVICES AND OTHER. For the nine months ended September 30, 2002
Licensed Services revenue consisted primarily of royalties from licensing
arrangements related to sales of consumable products to users of existing
eFax.com fax machines (no longer produced by the Company). For the nine months
ended September 30, 2001, Licensed Services revenue consisted primarily of
royalties from licensing arrangements and inventory sales both 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. Licensed Services 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 nine months ended September 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 75%, 18%, and 7% of our revenues,
respectively. The primary reason for the change from 2001 to 2002 was the faster
rate of growth of our Corporate channel in 2002. We expect our Corporate channel
to continue to represent a growing portion of our revenues in the future.
12
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 credit card processing fees, and equipment
depreciation. Cost of revenue was $8.7 million, or 26% of aggregate subscriber
and advertising revenue, and $10.0 million, or 45% of aggregate subscriber and
advertising revenue, for the nine months ended September 30, 2002 and 2001,
respectively. The decrease in cost of revenue as a percentage of sales was
primarily due to consolidation of various components of our infrastructure,
increased network efficiency, and our ability to negotiate reduced costs with
several of our vendors. For the remainder of 2002, we do not expect further
material decreases in cost of revenues as a percentage of sales.
SALES AND MARKETING. Sales and marketing costs are primarily related to
both subscriber and advertising revenue. For the nine months ended September 30,
2002 and 2001, these costs consisted primarily of personnel related expenses and
customer acquisition costs. Sales and marketing expenses were $4.7 million, or
14% of aggregate subscriber and advertising revenue, and $3.3 million, or 15% of
aggregate subscriber and advertising revenue, for the nine months ended
September 30, 2002 and 2001, respectively. The dollar increase in sales and
marketing costs is primarily due to increased marketing resulting from a more
aggressive customer acquisition campaign and additional selling personnel added
to the Corporate channel sales department.
RESEARCH AND DEVELOPMENT. Research and development costs were $2.3
million, or 7% of total revenue, and $1.9 million, or 8% of total revenue, for
the nine months ended September 30, 2002 and 2001, respectively. Research and
development costs primarily consisted of personnel related expenses. The
increase in research and development costs from 2001 to 2002 was primarily due
to an increase in personnel costs to accommodate our service enhancements, new
product development, and to continue to implement additional infrastructure
security.
GENERAL AND ADMINISTRATIVE. Our general and administrative costs consist
primarily of personnel related expenses, professional fees, and occupancy costs.
General and administrative costs were $10.0 million, or 29% of total revenue,
and $10.6 million, or 45% of total revenue, for the nine months ended September
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 September 30, 2002 versus 2001 was principally due to
increases in revenue over these comparable periods versus a stable level of
general and administrative expenses.
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 the first quarter of 2002, we completed the adoption
of SFAS No. 142. As required by SFAS No. 142, we discontinued amortizing the
remaining balances of goodwill and a trade name as of the beginning of fiscal
2002. All remaining and future acquired goodwill and intangible assets with
indefinite useful lives is 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 we completed the required impairment review and found no impairment in
goodwill or in the trade name.
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, we had an unamortized deferred credit of $225,000 related to such a
business combination. We recognized such amount in the accompanying statement of
operations.
For the nine months ended September 30, 2002 and 2001, amortization of
goodwill and other intangibles aggregated $112,500 and $5.2 million,
respectively.
13
OTHER INCOME, NET. Other income, net, was $387,000 and $1,076,000 for the
nine months ended September 30, 2002 and 2001, respectively. The decrease in
other income, net from 2001 to 2002 was primarily due to higher interest rates
earned on cash and investments (notwithstanding higher cash and investment
balances in 2002) in 2001 and certain real estate related sublease income in
2001 that was not present in 2002.
INCOME TAXES. As of January 1, 2002, we had total federal net operating
loss carry forwards ("NOL") of approximately $115 million. Approximately $65
million of such amount was obtained through the acquisition of eFax.com in
November 2000 and is substantially unusable due to certain "ownership change"
provisions of the Tax Reform Act of 1986. The specifics related to the usability
of the remaining NOL has been under a detailed analysis and review which has not
yet been completed. However, based on all of the factors known as of the date
hereof, we believe that enough NOLs are available to offset taxable income
generated to date in 2002. Accordingly, we do not believe that we have a federal
or state tax provision for the nine months ended September 30, 2002.
Based on our historical cumulative losses, the uncertainty of future
operating results, the uncertainty regarding any potential limitations on our
NOLs, and other factors, we cannot determine whether it is more likely than not
that we will realize the tax benefits of our NOL and other deferred tax assets,
and accordingly, a full valuation allowance is recorded. Our valuation allowance
is reviewed on a quarterly basis based on the facts and circumstances known at
the time.
LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 2002, we had $27.4 million in cash and cash
equivalents.
Net cash provided by operating activities was $9.9 million for the nine
months ended September 30, 2002. This compares to net cash used in operating
activities of $1.0 million for the nine months ended September 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 $1.4 million for the nine
months ended September 30, 2002. For the comparable period in 2001, net cash
provided by investing activities totaled $2.7 million. Net cash used for the
nine months ended September 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 nine months ended September 30, 2001 was comprised of redemption of
investments offset by purchases of furniture, fixtures, and equipment, and
advances under a note receivable.
For the nine months ending September 30, 2002, net cash used in financing
activities of $156,000 consisted of repayments of long-term debt offset by the
exercise of stock options. For the comparable period in 2001, net cash used in
financing activities of $2.7 million consisted of the repurchases of common
stock and warrants and repayments of long-term debt.
We finance a portion of our operating technology software and hardware,
office equipment, and certain insurance costs through capital leasing and loan
arrangements. Our software, hardware, and office equipment financing is secured
by the related assets. Our financing for insurance costs is unsecured. Amounts
due under these arrangements were $1.3 million and $683,000 as of September 30,
2002 and December 31, 2001, respectively, with installments due through 2005 at
fixed rates ranging from 3.4% to 17.7% per annum.
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.
14
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, but are not limited to, our ability to:
o Maintain, expand, and market to 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
upon 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
returns-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 this 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.
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.
15
We do not have derivative financial instruments for hedging, speculative,
or trading purposes.
ITEM 4. CONTROLS AND PROCEDURES
Within 90 days prior to the date of this report, we carried out an
evaluation, under the supervision and with the participation of our principal
executive officer and principal financial officer, of the effectiveness of the
design and operation of our disclosure controls and procedures. Based on this
evaluation, our principal executive officer and principal financial officer
concluded that our disclosure controls and procedures are effective in providing
them timely alerts of material information required to be included in our
periodic SEC reports or to otherwise be promptly released to the public. It
should be noted that the design of any system of controls is based in part upon
certain assumptions about the likelihood of future events, and there can be no
assurance that any design will succeed in achieving its stated goals under all
potential future conditions, regardless of how remote.
In addition, we reviewed our internal controls, and there have been no
significant changes in our internal controls or in other factors that could
significantly affect those controls subsequent to the date of their last
evaluation.
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
Not applicable
ITEM 5. OTHER INFORMATION
Not applicable
16
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
A. Exhibits.
99.1 Certification by Scott M. Jarus, President of j2 Global
Communications, Inc., pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
99.2 Certification by Nehemia Zucker, Chief Financial and
Marketing Officer of j2 Global Communications, Inc.,
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 July 23, 2002, j2 Global filed a report on Form 8-K
relating to its financial results and certain other
information for the quarter ended June 30, 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 as an exhibit to
the report and incorporated therein by reference.
2. On July 23, 2002, j2 Global filed a report on Form 8-K (FD)
relating to its July 2002 Investor Presentation disclosed
during j2 Global's second quarter 2002 earnings call. A copy
of the July 2002 Investor Presentation was attached as an
exhibit to the report and incorporated therein by reference.
3. On September 4, 2002, j2 Global filed a report on Form 8-K
(FD) announcing that j2 Global's President, Scott M. Jarus,
would be speaking at the Kaufman Bros. Communications
Conference. A copy of the material to be presented by Mr.
Jarus at the Conference was attached as an exhibit to the
report and incorporated therein by reference.
4. On September 5, 2002, j2 Global filed a report on Form 8-K
(FD) to follow up on Mr. Jarus' presentation at the Kaufman
Bros. Communications Conference. A transcript of Mr. Jarus'
remarks at the Conference was attached as an exhibit to the
report and incorporated therein by reference.
17
SIGNATURE
Pursuant to the requirements of the Securities and Exchange Act of 1934,
the Registrant has duly 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)
November 7, 2002
18
CERTIFICATIONS
I, Scott M. Jarus, certify that:
1. I have reviewed this quarterly report on Form 10-Q of j2 Global
Communications, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
(a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this quarterly report is being prepared;
(b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
(c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit committee
of registrant's board of directors (or persons performing the equivalent
function):
(a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
(b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
/s/ Scott M. Jarus
----------------------------
Scott M. Jarus
President
(Principal Executive Officer)
Dated: November 7, 2002
19
CERTIFICATIONS
I, Nehemia Zucker, certify that:
1. I have reviewed this quarterly report on Form 10-Q of j2 Global
Communications, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
(a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this quarterly report is being prepared;
(b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
(c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit committee
of registrant's board of directors (or persons performing the equivalent
function):
(a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
(b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
/s/ Nehemia Zucker
-------------------------------------
Nehemia Zucker
Chief Financial and Marketing Officer
(Principal Financial Officer)
Dated: November 7, 2002
20
EXHIBIT INDEX
-------------
Exhibit
Number Description of Exhibit
------ ----------------------
99.1 Certification by Scott M. Jarus, President of j2 Global
Communications, Inc., pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
99.2 Certification by Nehemia Zucker, Chief Financial and
Marketing Officer of j2 Global Communications, Inc.,
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
21