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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
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[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2003
OR
[_] 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: 0-25965
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J2 GLOBAL COMMUNICATIONS, INC.
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(Exact name of registrant as specified in its charter)
DELAWARE 51-0371142
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
6922 HOLLYWOOD BOULEVARD
SUITE 500
LOS ANGELES, 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 [_]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes [X] No [_]
As of July 31, 2003, the registrant had outstanding 11,442,020 shares of Common
Stock, $0.01 par value.
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J2 GLOBAL COMMUNICATIONS, INC.
FOR THE QUARTER ENDED JUNE 30, 2003
INDEX
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PART I. FINANCIAL INFORMATION PAGE
- ------- --------------------- ----
Item 1. Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheets (unaudited) .......... 3
Condensed Consolidated Statements of Operations (unaudited). 4
Condensed Consolidated Statements of Cash Flows (unaudited). 5
Notes to Condensed Consolidated Financial Statements ....... 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations ....................... 13
Item 3. Quantitative and Qualitative Disclosures About Market Risk. 19
Item 4. Controls and Procedures ................................... 19
PART II. OTHER INFORMATION
Item 1. Legal Proceedings ......................................... 20
Item 4. Submission of Matters to a Vote of Security Holders ....... 20
Item 6. Exhibits and Reports on Form 8-K .......................... 20
Signatures ......................................................... 22
Index to Exhibits .................................................. 23
-2-
PART I FINANCIAL INFORMATION
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Item 1. Financial Statements
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J2 GLOBAL COMMUNICATIONS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited, in thousands)
JUNE 30, DECEMBER 31,
2003 2002
---------- ----------
ASSETS
Cash and cash equivalents $ 44,428 $ 32,777
Short-term investments 2,079 --
Accounts receivable, net of allowances of
$313,000 and $233,000, respectively 5,234 5,082
Prepaid expenses and other current assets 996 1,408
---------- ----------
Total current assets 52,737 39,267
Furniture, fixtures and equipment, net 6,625 6,500
Goodwill and other purchased intangibles, net 17,616 17,324
Other assets 415 1,002
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Total assets $ 77,393 $ 64,093
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LIABILITIES & STOCKHOLDERS' EQUITY
Accounts payable and accrued expenses $ 3,462 $ 3,948
Deferred revenue 3,514 2,615
Current portion of long-term debt 303 595
---------- ----------
Total current liabilities 7,279 7,158
Long-term debt 221 252
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Total liabilities 7,500 7,410
---------- ----------
Total stockholders' equity 69,893 56,683
Total liabilities and stockholders' equity $ 77,393 $ 64,093
========== ==========
SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
-3-
J2 GLOBAL COMMUNICATIONS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited, in thousands except share and per share amounts)
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
----------------------------- -----------------------------
2003 2002 2003 2002
------------ ------------ ------------ ------------
Revenues:
Subscriber $ 16,307 $ 10,427 $ 30,761 $ 19,797
Advertising 609 705 1,221 1,532
Licensed services 121 174 263 357
------------ ------------ ------------ ------------
17,037 11,306 32,245 21,686
Cost of revenues 3,247 2,701 6,257 6,142
------------ ------------ ------------ ------------
Gross profit 13,790 8,605 25,988 15,544
------------ ------------ ------------ ------------
Operating expenses:
Sales and marketing 2,866 1,434 5,376 2,731
Research and development 1,023 744 2,049 1,532
General and administrative 3,743 3,341 7,211 6,772
------------ ------------ ------------ ------------
Total operating expenses 7,632 5,519 14,636 11,035
------------ ------------ ------------ ------------
Operating earnings 6,158 3,086 11,352 4,509
Interest and other income, net 69 232 143 325
------------ ------------ ------------ ------------
Earnings before income taxes and
cumulative effect of change
in accounting principle 6,227 3,318 11,495 4,834
Income tax expense 280 -- 515 --
------------ ------------ ------------ ------------
Earnings before cumulative effect
of change in accounting principle 5,947 3,318 10,980 4,834
Cumulative effect of change in
accounting principle -- -- -- 225
------------ ------------ ------------ ------------
Net earnings $ 5,947 $ 3,318 $ 10,980 $ 5,059
============ ============ ============ ============
Net earnings per common share:
Basic $ 0.53 $ 0.31 $ 0.98 $ 0.47
Diluted $ 0.47 $ 0.28 $ 0.88 $ 0.44
Weighted average shares outstanding:
Basic 11,309,927 10,757,212 11,227,714 10,743,383
Diluted 12,601,585 11,814,344 12,440,135 11,527,657
SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
-4-
J2 GLOBAL COMMUNICATIONS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited, in thousands)
SIX MONTHS ENDED JUNE 30,
------------------------------
2003 2002
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Cash flows from operating activities:
Net earnings $ 10,980 $ 5,059
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Depreciation and amortization 1,934 1,765
Non-cash income tax expense 203 --
Compensation in exchange for note reduction 87 87
Compensation in exchange for common stock -- (47)
Gain on sale of investment -- (162)
Cumulative effect of change in accounting principle -- (225)
Decrease (increase) in:
Accounts receivable (107) (378)
Interest receivable 6 (21)
Prepaid expenses 487 388
Other assets (99) (224)
(Decrease) increase in:
Accounts payable (490) (1,240)
Deferred revenue 849 396
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Net cash provided by operating activities 13,850 5,398
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Cash flows from investing activities:
Purchases of short-term investments, net (2,079) --
Purchase of furniture, fixtures and equipment (1,714) (1,297)
Purchase of intangible asset (200) --
Acquisition of a business, net of cash received (175) --
Repayments of notes receivable, net 498 159
Proceeds from sale of equipment 73 --
Proceeds from sale of an investment -- 169
------------ ------------
Net cash used in investing activities (3,597) (969)
------------ ------------
Cash flows from financing activities:
Issuance of common stock under employee stock
purchase plan 178 --
Exercise of stock options 1,849 486
Repayment of long-term debt and capital leases (629) (559)
------------ ------------
Net cash provided by (used in) financing activities 1,398 (73)
------------ ------------
Net increase in cash and cash equivalents 11,651 4,356
Cash and cash equivalents at beginning of year 32,777 19,087
------------ ------------
Cash and cash equivalents at end of period $ 44,428 $ 23,443
============ ============
SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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J2 GLOBAL COMMUNICATIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2003
(UNAUDITED)
NOTE 1 - BASIS OF PRESENTATION
j2 Global Communications, Inc. (the "Company") is a leading provider of
outsourced, value-added messaging and communications services to individuals and
businesses throughout the world. The Company is a Delaware corporation and was
founded in 1995.
The consolidated financial statements include the accounts of the
Company and its direct and indirect wholly-owned subsidiaries; eFax.com, Inc.,
SureTalk.com, Inc., Documagix, Inc., ProtoDyne, Inc., j2 Latin America, Inc. and
dotCOM, Ltd. All inter-company accounts and transactions have been eliminated in
consolidation.
The accompanying interim condensed consolidated financial statements
and related financial schedules are unaudited. The Company's interim condensed
consolidated financial statements have been prepared in accordance with
accounting principles generally accepted in the United States of America
("GAAP") including those for interim financial information and with the
instructions for Form 10-Q and Article 10 of Regulation S-X issued by the
Securities and Exchange Commission ("SEC"). Accordingly, they do not include all
of the information and note disclosures required by GAAP for complete financial
statements. These statements are unaudited and, in the opinion of management,
all adjustments (which include only normal recurring adjustments) considered
necessary for a fair presentation have been included. Certain reclassifications
have been made to the prior year financial statements to conform to the current
year presentation. These consolidated financial statements should be read in
conjunction with the audited financial statements and related notes for the year
ended December 31, 2002 included in the Company's Annual Report on Form 10-K
filed with the SEC on March 31, 2003 and the Company's Quarterly Report on Form
10-Q filed with the SEC on May 9, 2003.
The results of operations for these interim periods are not necessarily
indicative of the operating results for the full year or for any future period.
NOTE 2 - USE OF ESTIMATES
The preparation of financial statements, in conformity with 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. On an
ongoing basis, management evaluates its estimates, including those related to
revenue recognition, allowances for doubtful accounts and the valuation of
deferred income taxes, long-lived and intangible assets and goodwill. These
estimates are based on historical experience and on various other assumptions
that are believed to be reasonable under the current circumstances, the results
of which form the basis for making judgments about the carrying values of assets
and liabilities that are not readily apparent from other sources. Actual results
could differ from those estimates.
NOTE 3 - RECENT ACCOUNTING PRONOUNCEMENTS
In June 2002, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 146, "Accounting for
Exit or Disposal Activities". SFAS No. 146 addresses significant issues
regarding the recognition, measurement and reporting of costs that are
associated with exit and disposal activities, including restructuring activities
that are currently accounted for under Emerging Issues Task Force ("EITF") No.
94-3, "Liability Recognition for Certain Employee Termination Benefits and Other
Costs to Exit and Activity (including Certain Costs Incurred in a
Restructuring)". The scope of SFAS No. 146 also includes costs related to
terminating a contract that is not a capital lease and termination benefits that
employees who are involuntarily terminated receive under the terms of a one-time
benefit arrangement that is not an ongoing benefit arrangement or an individual
deferred-compensation contract. SFAS No. 146 is effective for exit or disposal
-6-
activities initiated after December 31, 2002. The adoption of SFAS No. 146 in
the first quarter of fiscal 2003 did not have a material effect on the Company's
financial condition, results of operations or liquidity.
In December 2002, the FASB issued SFAS No. 148, "Accounting for
Stock-Based Compensation-Transition and Disclosure". This statement amends SFAS
No. 123, "Accounting for Stock-Based Compensation", to provide alternative
methods of transition for a voluntary change to the fair value-based method of
accounting for stock-based employee compensation. In addition, SFAS No. 148
amends the disclosure requirements of SFAS No. 123 to require prominent
disclosure in both annual and interim financial statements about the method of
accounting for stock-based employee compensation and the effect of the method
used on reported results. This Statement also amends Accounting Principles Board
Opinion ("APBO") No. 28, "Interim Financial Reporting", to require disclosure
about those effects in interim financial information. The amendments to SFAS No.
123 are effective for financial statements for fiscal years ending after
December 15, 2003. The required disclosures for interim financial statements are
effective for financial reports containing condensed financial statements for
interim periods beginning after December 15, 2002. As the Company has elected
not to change to the fair value-based method of accounting for stock-based
employee compensation, SFAS No. 148 will have no impact on the Company's
financial condition, results of operations or liquidity. Please refer to Note 9
to the condensed consolidated financial statements included herein for interim
disclosures regarding stock-based employee compensation.
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement
133 on Derivative Instruments and Hedging Activities". This statement amends
SFAS 133 to clarify the financial accounting and reporting of derivative
instruments and hedging activities and requires contracts with similar
characteristics to be accounted for on a comparable basis. SFAS No. 149 is
effective for contracts entered into or modified after June 30, 2003. The
Company does not expect the adoption of SFAS No. 149 to have a material effect
on its financial condition, results of operations or liquidity.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of Both Liabilities and Equity". The
statement establishes standards for classifying and measuring as liabilities
certain financial instruments that embody obligations of the issuer and have
characteristics of both liabilities and equity. SFAS No. 150 must be applied
immediately to instruments created or modified after May 31, 2003. The adoption
of SFAS No. 150 in the second quarter of fiscal 2003 did not have a material
effect on the Company's financial condition, results of operations or liquidity.
NOTE 4 - CRITICAL ACCOUNTING POLICIES
REVENUE RECOGNITION
The Company's subscriber revenues consist substantially of monthly
recurring and usage based subscription fees. In accordance with GAAP and with
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, the Company defers the portions of monthly recurring and usage based
fees collected in advance and recognizes them in the period earned.
Additionally, the Company defers and recognizes subscriber activation fees and
related direct incremental costs over a subscriber's estimated useful life.
The Company's advertising revenue consists primarily of revenues
derived by delivering email messages on behalf of advertisers to its customers
who elect to receive such messages. Revenues are recognized in the period in
which the advertising services are performed, provided that no significant
Company obligations remain and the collection of the resulting receivable is
reasonably assured.
VALUATION OF LONG-LIVED ASSETS
The Company assesses the impairment of long-lived assets, which include
furniture, fixtures and equipment and identifiable intangible assets with finite
useful lives (subject to amortization), in accordance with the provisions of
SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets".
This Statement addresses financial accounting and reporting for the impairment
or disposal of long-lived assets and requires that long-lived assets be reviewed
-7-
for impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. SFAS No. 144 also requires
companies to separately report discontinued operations and extends that
reporting to a component of an entity that either has been disposed of (by sale,
abandonment or in a distribution to owners) or is classified as held for sale.
Assets to be disposed of are reported at the lower of the carrying amount or
fair value less costs to sell.
In accordance with SFAS No. 144, the Company assesses the impairment of
long-lived assets whenever events or changes in circumstances indicate that the
carrying value may not be recoverable. Impairment indicators the Company
considers important, which could individually or in combination 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 the Company's use of the
acquired assets or the strategy for its overall business;
o significant negative industry or economic trends;
o significant decline in the Company's stock price for a sustained
period; and
o the Company's market capitalization relative to net book value.
If events and circumstances indicate that the carrying amount of a
long-lived asset may not be recoverable and the expected undiscounted future
cash flows attributable to the asset are less than the carrying amount of that
asset, an impairment loss equal to the excess of the asset's carrying value over
its fair value is recorded. Fair value is determined based on the present value
of estimated expected future cash flows using a discount rate commensurate with
the risk involved, quoted market prices or appraised values, depending on the
nature of the assets.
In accordance with SFAS No. 144, during the first and second quarters
of 2003, the Company assessed whether events or changes in circumstances
occurred that potentially indicate the carrying amount of long-lived assets may
not be recoverable. Having done so, the Company concluded that there were no
such events or changes in circumstances during the three and six months ended
June 30, 2003. Net long-lived assets amounted to $7.5 million as of June 30,
2003.
VALUATION OF GOODWILL AND OTHER INTANGIBLE ASSETS
The Company assesses the impairment of goodwill and a trade name with
an indefinite useful life (not subject to amortization) in accordance with the
provisions of SFAS No. 142, "Goodwill and Other Intangible Assets". Under SFAS
No. 142, goodwill and intangible assets with indefinite useful lives are no
longer amortized, but are tested for impairment at a reporting unit level on an
annual basis and between annual tests if an event occurs or circumstances change
that would more likely than not reduce the fair value of a reporting unit below
its carrying value amount. Impairment indicators the Company considers
important, which could individually or in combination trigger an impairment
review, include the following:
o significant adverse change in legal factors or in the business
climate;
o adverse action or assessment by a regulator;
o unanticipated competition;
o significant changes in the manner of the Company's use of the
acquired assets or the strategy for its overall business;
o loss of key personnel;
o significant negative industry or economic trends; and
o significant decline in the Company's stock price for a sustained
period.
-8-
For purposes of financial reporting and impairment testing in
accordance with SFAS No. 142, the Company operates in one principal reporting
unit, a provider of outsourced, value-added unified messaging and communications
services.
In testing for a potential impairment of goodwill and a trade name with
an indefinite useful life, the Company first compares its estimated fair value
with its book value, including goodwill and a trade name with an indefinite
useful life. If the Company's estimated fair value exceeds its book value, the
assets are considered not to be impaired and no additional steps are necessary.
If, however, the fair value of the Company is less than its book value, then the
Company is required to compare the carrying amount of its goodwill and trade
name with their respective implied fair values. The estimate of implied fair
value of these assets may require independent valuations of certain internally
generated and unrecognized intangible assets such as our subscriber base,
software and technology and patents and trademarks. If the carrying amounts of
goodwill and the trade name exceed their respective implied fair values, an
impairment loss would be recognized in an amount equal to the excess.
In accordance with SFAS No. 142, the Company performed annual
impairment tests of goodwill and this trade name as of December 31, 2002 and
concluded that, as of that date, there was no impairment. Furthermore, during
the first and second quarters of 2003, the Company assessed whether events or
changes in circumstances occurred that potentially indicate that the carrying
amount of these assets may not be recoverable. Having done so, the Company
concluded that there were no such events or changes in circumstance during the
three and six months ended June 30, 2003. Net goodwill and a trade name with an
indefinite useful life amounted to $16.7 million as of June 30, 2003.
VALUATION OF DEFERRED TAX ASSETS
Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases and operating loss and tax credit carry-forwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date. The Company's ability to realize the deferred tax asset is
assessed throughout the year and a valuation allowance is established
accordingly.
NOTE 5 - NET EARNINGS PER SHARE
Basic net earnings per share are computed on the basis of the weighted
average number of common shares outstanding. Diluted net earnings per share are
computed on the basis of the weighted average number of common shares
outstanding plus the effect of outstanding stock options and warrants using the
"treasury stock" method. For the three and six months ended June 30, 2003 and
2002, the components of basic and diluted net earnings per share were as follows
(in thousands except share and per share amounts):
-9-
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
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2003 2002 2003 2002
------------ ------------ ------------ ------------
Numerator for basic and diluted net
earnings per common share:
Net earnings $ 5,947 $ 3,318 $ 10,980 $ 5,059
------------ ------------ ------------ ------------
Denominator:
Weighted average outstanding shares of
common stock 11,309,927 10,757,212 11,227,714 10,743,383
Dilutive effect of:
Employee stock options 1,126,422 1,020,228 1,059,960 784,274
Warrants 165,236 36,904 152,461 --
------------ ------------ ------------ ------------
Common stock and common stock equivalents 12,601,585 11,814,344 12,440,135 11,527,657
------------ ------------ ------------ ------------
Net earnings per share:
Basic $ 0.53 $ 0.31 $ 0.98 $ 0.47
============ ============ ============ ============
Diluted $ 0.47 $ 0.28 $ 0.88 $ 0.44
============ ============ ============ ============
NOTE 6 - ACQUISITION
On January 30, 2003, the Company acquired dotCOM, Ltd., d/b/a Cyberbox,
a Hong Kong-based company, for approximately $183,000 in cash, subject to
adjustment based upon certain customer retention targets. The transaction has
been accounted for under the purchase method and, accordingly, the results of
operations of dotCOM, Ltd. have been included in the consolidated results of the
Company since the date of acquisition. The excess of the purchase price over the
fair value of net assets acquired amounted to approximately $149,000. The excess
purchase price was comprised of approximately $122,000 of goodwill and $27,000
of identifiable intangible assets.
NOTE 7 - GOODWILL AND INTANGIBLE ASSETS
Upon the adoption of SFAS No. 142, "Goodwill and Other Intangible
Assets", in the first quarter of 2002, the Company discontinued amortizing the
remaining balances of goodwill and a trade name with an indefinite useful life.
In accordance with this Statement, no goodwill or trade name amortization was
recorded during the three and six-month periods ended June 30, 2003 and 2002.
SFAS No. 142 also required that the amount of any unamortized deferred
credit from a business combination effected prior to July 1, 2001 be recognized
into earnings as the effect of a cumulative change of accounting principle. In
the first quarter of 2002, the Company recognized such a deferred credit
amounting to $225,000 in the accompanying condensed consolidated statement of
operations.
The following table reconciles per share data for net earnings before
the cumulative effect of a change in accounting principle to net earnings after
such change for the three and six-month periods ending June 30, 2003 and 2002:
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THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
----------------------------- -----------------------------
2003 2002 2003 2002
------------ ------------ ------------ ------------
Basic net earnings before cumulative effect
of a change in accounting principle $ 0.53 $ 0.31 $ 0.98 $ 0.45
Cumulative effect of a change in
accounting principle -- -- -- 0.02
------------ ------------ ------------ ------------
Basic net earnings per common share $ 0.53 $ 0.31 $ 0.98 $ 0.47
============ ============ ============ ============
Diluted net earnings before cumulative
effect of a change in accounting
principle $ 0.47 $ 0.28 $ 0.88 $ 0.42
Cumulative effect of a change in
accounting principle -- -- -- 0.02
------------ ------------ ------------ ------------
Diluted net earnings per common share $ 0.47 $ 0.28 $ 0.88 $ 0.44
============ ============ ============ ============
Weighted average shares outstanding:
Basic 11,309,927 10,757,212 11,227,714 10,743,383
============ ============ ============ ============
Diluted 12,601,585 11,814,344 12,440,135 11,527,657
============ ============ ============ ============
Intangible assets, which are included in other purchased intangibles,
are recorded at cost, less accumulated amortization. Amortization of intangible
assets with finite lives is provided over their estimated useful lives currently
ranging from 4 months to 8 years on a straight-line basis. Amortization expense,
included in general and administrative expense, during the three and six-month
periods ended June 30, 2003 approximated $31,000 and $56,000, respectively.
Amortization expense for the fiscal year ended December 31, 2003 through
December 2007 is estimated to approximate $150,000 per year and amortization
expense for the fiscal year ended December 31, 2008 is estimated to approximate
$120,000.
Goodwill and a trade name with an indefinite useful life are recorded
net of accumulated amortization through December 31, 2001. As of June 30, 2003,
intangible assets with finite lives, goodwill and trade name balances, net of
accumulated amortization were as follows (in thousands):
AMORTIZATION HISTORICAL ACCUMULATED
PERIOD COST AMORTIZATION NET
------------ ------------ ------------ ------------
INTANGIBLE ASSETS SUBJECT TO AMORTIZATION
Acquired product technology rights:
Patent 8 years $ 1,005 $ 145 $ 860
Other 4 months to 3 years 59 29 30
INTANGIBLE ASSETS NOT SUBJECT TO AMORTIZATION
Goodwill $ 23,639 $ 8,181 $ 15,458
Indefinite-lived trade name 1,500 $ 232 1,268
------------
GOODWILL AND OTHER PURCHASED INTANGIBLES, NET $ 17,616
------------
-11-
NOTE 8 - INCOME TAXES
As of January 1, 2003, the Company had federal and state (California)
net operating loss carry-forwards ("NOLs") of approximately $109 million and $43
million, respectively. These NOLs expire through the year 2021 for the federal
and 2013 for the state. In addition, as of January 1, 2003, the Company had
federal and state research and development tax credits of $940,000 and $630,000,
respectively, which expire through the year 2021 for federal purposes and are
available indefinitely for state purposes.
The Tax Reform Act of 1986 imposed substantial restrictions on the
utilization of NOLs in the event of an "ownership change" (as defined in the
Internal Revenue Code) of a corporation. The Company's ability to utilize NOLs
is limited as a result of such "ownership changes". The NOLs attributable to the
eFax.com and SureTalk.com subsidiaries before their acquisitions by the Company
are also limited according to these provisions. After giving effect to these
limitations, as of December 31, 2002, we estimated that approximately $50
million of the federal NOL and $43 million of the state NOL would be available
for use before their expiration.
The Company's valuation allowance is reviewed quarterly based upon the
facts and circumstances known at the time. Based on its historical losses, the
uncertainty of future operating results and other factors, the Company has
determined that it is not more likely than not that we will realize the tax
benefits of our NOLs and other deferred tax assets for which a full valuation
allowance is recorded.
In September 2002, the State of California enacted legislation that
prevents taxpayers from utilizing NOL carry-forwards in the 2002 and 2003 tax
years only. As a result, 2003 state income tax expense for the three and
six-month periods ending June 30, 2003 approximated $280,000 and $515,000,
respectively, which amounts consist of apportioned California taxes offset by
certain state research and development tax credits.
NOTE 9 - ACCOUNTING FOR STOCK OPTIONS
The Company applies the intrinsic value-based method of accounting
prescribed by APBO No. 25, "Accounting for Stock Issued to Employees", and
related interpretations to account for its fixed plan stock options. Under this
method, compensation expense is generally recorded on the date of grant only if
the current market price of the underlying stock exceeded the exercise price.
The Company has adopted the disclosure only provisions of SFAS No. 123,
"Accounting for Stock-Based Compensation", and SFAS No. 148, "Accounting for
Stock-Based Compensation-Transition and Disclosure", which was released in
December of 2002 as an amendment to SFAS No. 123. These statements establish
accounting and disclosure requirements using a fair value-based method of
accounting for stock-based employee compensation plans. As allowed by SFAS No.
123 and SFAS No. 148, the Company has elected to continue to apply the intrinsic
value-based method of accounting described above.
The Company accounts for option grants to non-employees using the
guidance of SFAS No. 123, as amended by SFAS No. 148, and EITF No. 96-18,
whereby the fair value of such options is determined using the Black-Scholes
option pricing model at the earlier of the date at which the non-employee's
performance is complete or a performance commitment is reached.
In accordance with the intrinsic value method, no compensation cost has
been recognized for the Company's fixed plan stock option grants in the
accompanying financial statements. If the fair value-based method had been
applied in measuring stock compensation expense under SFAS No. 123, as amended
by SFAS No. 148, the pro forma effect on net earnings and net earnings per share
would have been as follows (in thousands, except share and per share amounts):
-12-
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
----------------------------- -----------------------------
2003 2002 2003 2002
------------ ------------ ------------ ------------
Net earnings, as reported $ 5,947 $ 3,318 $ 10,980 $ 5,059
Add: Stock based employee compensation
expense included in reported net
earnings, net of related tax benefits -- -- -- --
Deduct: Stock based employee compensation
expense determined under the fair
value-based method for all awards,
net of related tax effects (487) (340) (889) (639)
------------ ------------ ------------ ------------
Pro forma net earnings $ 5,460 $ 2,978 $ 10,091 $ 4,420
============ ============ ============ ============
Basic net earnings per common share:
As reported $ 0.53 $ 0.31 $ 0.98 $ 0.47
============ ============ ============ ============
Pro forma $ 0.48 $ 0.28 $ 0.90 $ 0.41
============ ============ ============ ============
Diluted net earnings per common share:
As reported $ 0.47 $ 0.28 $ 0.88 $ 0.44
============ ============ ============ ============
Pro forma $ 0.43 $ 0.25 $ 0.81 $ 0.38
============ ============ ============ ============
NOTE 10 - SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for interest during the six-month periods ended June 30, 2003
and 2002 approximated $28,000 and $40,000, respectively, substantially all of
which related to long-term debt and capital leases.
Cash paid for income taxes during the six-month periods ended June 30,
2003 and 2002 approximated $60,000 and zero, respectively.
In the second quarter of 2003, the Company entered into a loan
arrangement approximating $66,000 to finance a corporate insurance policy.
During the six months ended June 30, 2003 and 2002, the Company entered
into capital lease arrangements for certain computer equipment and software
approximating $240,000 and $543,000, respectively.
Through the six months ended June 30, 2003, the Company recorded the
tax benefit from the exercise of non-qualified stock options as a reduction of
its income tax liability and an increase in equity in the amount of
approximately $203,000.
NOTE 11 - SUBSEQUENT EVENT
On August 5, 2003, the Company's Board of Directors declared a
two-for-one stock split effected in the form of a stock dividend, payable August
29, 2003 to shareholders of record on August 18, 2003. Per share and weighted
average share amounts have not been restated in the accompanying financial
statements and related notes to reflect this split. We expect the shares issued
in this stock split to begin trading on the NASDAQ National Market effective
September 2, 2003.
Item 2. Management's Discussion and Analysis of Financial Condition
- --------------------------------------------------------------------
and Results of Operations
-------------------------
-13-
ORGANIZATION AND DESCRIPTION OF BUSINESS
j2 Global Communications, Inc. ("we," "us" and "our") is a leading
provider of outsourced, value-added messaging and communications services to
individuals and businesses throughout the world. We are a Delaware corporation
and were founded in 1995. We offer faxing and voicemail solutions, document
management solutions, Web-initiated conference calling and unified messaging
services. We market our services principally under the brand names eFax(R),
jConnect(R), JFAX(R), eFax Corporate(R), jBlast(R), eFax BroadcastTM,
Consensus(R), PaperMaster(R), Documagix(R) and Hotsend(R).
We deliver our services through our global telephony/Internet Protocol
("IP") network, which covers more than 1,000 cities in 19 countries across 5
continents. We have created this network, and continuously seek to expand it,
through negotiating with U.S. and foreign telecommunications providers for
telephone numbers (also referred to as Direct Inward Dial numbers or "DIDs"),
Internet bandwidth and co-location space for our equipment. In addition, we have
expanded our network through small acquisitions of local players in
international territories, such as Hong Kong, and we intend to continue to
pursue similar acquisitions in the future. As of June 30, 2003, we had more than
5.2 million telephone numbers deployed to our customers. In addition, we
maintain an inventory of additional telephone numbers to be assigned to new
customers.
We organize our marketing and sales efforts into three distinct
channels: Web, Corporate and Licensed Services. The Web channel, which currently
generates the majority of our revenues, markets our eFax(R), jConnect(R) and
Consensus(R) branded services primarily to individuals and small businesses
through a combination of Internet-based marketing and advertising, an in-house
telesales group and word-of-mouth. Introduced in late-2000, the Corporate
channel markets our eFax Corporate(R) branded service to midsize and large
businesses, as well as government agencies, through an in-house direct sales
force. The Corporate channel also markets our eFax BroadcastTM and jBlast(R)
products through an outsourced telesales organization. Our Licensed Services
channel seeks to integrate, on an opportunistic basis, our services and network
capabilities into third-party product offerings, to sell our software and to
license our intellectual property.
We generate a substantial portion of our revenues from subscribers that
pay through activation, subscription and usage fees. Greater than two-thirds of
our Corporate channel revenue is generated by usage fees. We also generate a
small percentage of our overall revenues from advertising to non-paid
subscribers (sometimes referred to as "Free" subscribers). These
"advertising-supported" subscribers, which are managed through our Web channel,
also serve as a significant source of new paid subscribers, both for the Web
channel and the Corporate channel. This process of migrating
advertising-supported customers to paid services is part of our "life cycle
management" program. This program includes monitoring the usage level of
advertising-supported customers, sending them promotional up-sell messages and
culling out subscribers that do not adhere to the limitations on free services
set forth in our customer agreements. In addition, our life cycle management
program is designed to encourage more frequent use of our services by paid
subscribers.
Of the more than 5.2 million telephone numbers deployed as of June 30,
2003, our Web channel had approximately 293,000 direct paying telephone numbers
and approximately 4.8 million advertising-supported telephone numbers. Our
Corporate channel had approximately 56,000 telephone numbers deployed. For the
six months ended June 30, 2003, our Web, Corporate and Licensed Services channel
revenues represented 71%, 29% and less than 1% of our total revenues,
respectively.
RESULTS OF OPERATIONS FOR THE THREE AND SIX-MONTH PERIODS ENDED
JUNE 30, 2003 AND 2002
REVENUE ITEMS
SUBSCRIBER REVENUES. Subscriber revenues, which accounted for approximately 96%
of our total revenues for each of the three and six-month periods ended June 30,
2003, are comprised primarily of monthly recurring subscription and usage based
fees. Subscriber revenues were $16.3 million and $10.4 million for the three
months ended June 30, 2003 and 2002, respectively. For the six months ended June
30, 2003 and 2002, subscriber revenues were $30.8 million and $19.8 million,
respectively. The increases in subscriber revenues during these periods were due
primarily to an increase in our paying subscribers in both our Web and Corporate
-14-
channels and an increase in usage levels in our Corporate channel. The increases
in paid subscribers in our Web channel were the result of new Web sign-ups
derived from word-of-mouth, a decrease in cancellations, increased Internet
advertising and conversions of existing advertising-supported customers to paid
services as a result of our "lifecycle management" program. The increases in
paid subscribers in our Corporate channel were the result of new customer and
DID additions generated by our direct sales force. Our number of subscribers
(both paid and advertising-supported) was greater than 5.2 million and 4.5
million as of June 30, 2003 and 2002, respectively, and the percentage of paid
subscribers has increased year-over-year.
Effective mid-June 2003, we implemented a price increase for new
subscribers of our Web channel services. Based on the limited information
available to date, we believe that the price increase has resulted in an overall
increase in Web channel revenues, however, its effect on future total revenues
cannot yet be determined. A decision whether to apply the price increase to our
existing Web channel customer base has not yet been made.
ADVERTISING. We generate advertising revenues, which accounted for approximately
4% of our total revenues for each of the three and six-month periods ended June
30, 2003, primarily by delivering email messages on behalf of advertisers to our
customers primarily those in our advertising-supported Web channel base.
Advertising revenues, a component of our Web channel, were $609,000 and $705,000
for the three months ended June 30, 2003 and 2002, respectively. For the six
months ended June 30, 2003 and 2002, advertising revenues were $1.2 million and
$1.5 million, respectively. The decreases in advertising revenues were due,
among other reasons, to weaker demand for email advertising market in the first
half of 2003 compared to the first half of 2002, which resulted in less
advertising spend by our advertisers and a slight decrease in advertising rates.
We expect the demand for email advertising market demand to remain weak for the
remainder of 2003 and, as a result, our advertising revenues may further decline
unless we are able to offset that decline by offering added value to our
advertisers or by significantly increasing the number of our
"advertising-supported" customers.
LICENSED SERVICES. Licensed Services channel revenues, which accounted for less
than 1% of our total revenues for each of the three and six-month periods ended
June 30, 2003, consisted primarily of revenues from licensing our PaperMaster(R)
document management software. For the three and six months ended June 30, 2002,
our Licensed Services channel consisted primarily of royalties and revenues from
licensing our PaperMaster(R) document management software.
REVENUES BY CHANNEL. For each of the three and six-month periods ended June 30,
2003, our Web, Corporate and Licensed Services channel revenues represented 71%,
29% and less than 1% of our total revenues, respectively. For the three and
six-month periods ended June 30, 2002, our Web, Corporate and Licensed Services
channel revenues represented 74%, 24% and 2% of our revenues, respectively. The
primary reason for the change in these revenue percentages across the sales
channels was the faster rate of growth of our Corporate channel during 2003.
COST OF REVENUES. Cost of revenues is comprised primarily of costs associated
with data and voice transmission, telephone numbers, customer service, online
processing fees and equipment depreciation. Cost of revenues was $3.2 million,
or 19% of total revenues, and $2.7 million, or 24% of total revenues, for the
three months ended June 30, 2003 and 2002, respectively. For the six months
ended June 30, 2003 and 2002, cost of revenues were $6.3 million, or 19% of
total revenues, and $6.1 million, or 28% of total revenues, respectively. The
overall increases in cost of revenues corresponded to an increase in
subscription revenues, relative to the variable costs to support those
subscription revenues. The decreases in cost of revenues as a percentage of
revenues were a result of our ability to negotiate reduced costs with several of
our vendors and the consolidation of various components of our infrastructure
during the first six months of 2002 with a continuing effect into this past
quarter's results.
OPERATING EXPENSES
SALES AND MARKETING. Sales and marketing expenses are comprised primarily of
payments to sales and marketing personnel, customer acquisition payments,
advertising expenses, consulting services, promotional and public relations
activities, trade show appearances and other business development activities.
Our marketing and advertising relationships consist primarily of fixed cost,
impression-based, search engine placement and cost-per-click advertising
arrangements with an array of online service providers. On an ongoing basis, we
assess the effectiveness of these relationships in acquiring customers at
acceptable costs.
-15-
Sales and marketing expenses were $2.9 million, or 17% of total
revenues, and $1.4 million, or 13% of total revenues, for the three months ended
June 30, 2003 and 2002, respectively. For the six months ended June 30, 2003 and
2002, sales and marketing expenses were $5.4 million, or 17% of total revenues,
and $2.7 million, or 13% of total revenues, respectively. These increases in
sales and marketing expenses were due primarily to a more aggressive Web channel
customer acquisition campaign and additional selling personnel added to the
Corporate channel.
Amounts expensed under agreements with online service providers are
included in sales and marketing expense. For the three months ended June 30,
2003 and 2002, total amounts expensed under these agreements were $375,000 and
$75,000, respectively. For the six months ended June 30, 2003 and 2002, total
amounts expensed under these agreements were $750,000 and $75,000, respectively.
RESEARCH AND DEVELOPMENT. Our research and development costs consist primarily
of personnel related costs. Research and development costs were $1.0 million, or
6% of total revenues, and $744,000, or 7% of total revenues, for the three
months ended June 30, 2003 and 2002, respectively. For the six months ended June
30, 2003 and 2002, research and development costs were $2.0 million, or 6% of
total revenues, and $1.5 million, or 7% of total revenues, respectively. The
increases in research and development costs were primarily due to an increase in
personnel costs to develop and implement additional service features and
functionality and continue to bolster the capacity and security of our
infrastructure to accommodate our growing customer base. Research and
development costs as a percentage of revenue decreased as a result of
proportionately greater increases in revenues over the same periods.
AMORTIZATION OF GOODWILL AND OTHER INTANGIBLES. Upon the adoption of SFAS No.
142, "Goodwill and Other Intangible Assets", in the first quarter of 2002, we
discontinued amortizing the remaining balances of goodwill and a trade name with
an indefinite useful life. In accordance with this statement, no goodwill or
trade name amortization was recorded during the three and six-month periods
ended June 30, 2003 and 2002.
SFAS No. 142 also required that the amount of any unamortized deferred
credit from a business combination effected prior to July 1, 2001 be recognized
into earnings as the effect of a cumulative change of accounting principle. In
the first quarter of 2002, we recognized such a deferred credit amounting to
$225,000 in the accompanying condensed consolidated statement of operations.
Amortization of other intangibles, included in general and
administrative expenses, aggregated $31,000 and $19,000 for the three months
ended June 30, 2003 and 2002, respectively, and $56,000 and $131,000 for the six
months ended June 30, 2003 and 2002, respectively. The $131,000 as of June 30,
2002 primarily represented amortization for an intangible asset with a finite
useful life under SFAS No. 142. This intangible asset was fully amortized as of
January 2002. See Note 7 to the accompanying condensed consolidated financial
statements for a further discussion of goodwill and intangible assets.
INTEREST AND OTHER INCOME. For the three and six-month periods ended June 30,
2003, interest and other income consisted primarily of interest earned on cash,
cash equivalents and short-term investments. For the three and six-month periods
ended June 30, 2002, interest and other income consisted primarily of a gain on
the sale of an investment and interest earned on cash and cash equivalents.
Interest and other income amounted to $69,000 and $232,000 for the three months
ended June 30, 2003 and 2002, respectively, and $143,000 and $325,000 for the
six months ended June 30, 2003 and 2002, respectively. The decreases in interest
and other income for the three and six-month periods ending June 30, 2003 were
primarily due to a gain on the sale of an investment approximating $162,000
occurring in the first half 2002 and higher interest rates earned on cash and
investments in 2002 (notwithstanding higher cash and investment balances for
2003).
INCOME TAXES. As of January 1, 2003, we had federal and state (California) Net
Operating Loss carry-forwards ("NOLs") of approximately $109 million and $43
million, respectively. These NOLs expire through the year 2021 for the federal
NOL and 2013 for the state NOL. In addition, as of December 31, 2002, we had
federal and state research and development tax credits of $940,000 and $630,000,
respectively, which expire through the year 2021 for federal purposes and last
indefinitely for state purposes.
The Tax Reform Act of 1986 imposed substantial restrictions on the
utilization of NOLs in the event of an "ownership change" (as defined in the
Internal Revenue Code) of a corporation. Our ability to utilize NOLs is limited
-16-
as a result of such "ownership changes". The NOLs attributable to the eFax.com
and SureTalk.com subsidiaries before we acquired them are also limited according
to these provisions. After giving effect to these limitations, as of December
31, 2002 we estimated that approximately $50 million of the federal NOL and $43
million of the state NOL would be available for use before their expiration.
Income tax expense amounted to approximately $280,000 and zero for the
three months ended June 30, 2003 and 2002, respectively. For the six months
ended June 30, 2003 and 2002, income tax expense was $515,000 and zero,
respectively. In September 2002, the State of California enacted legislation
that prevents taxpayers from utilizing their NOLs in the 2002 and 2003 tax years
only. As a result, 2003 state income tax expense of $280,000 and $515,000 for
the three and six-month periods ended June 30, 2003 and 2002, respectively,
consists of apportioned California taxes offset by certain state research and
development tax credits. For the remainder of 2003, we expect to incur
California income tax expense of approximately 5% of income before taxes.
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 2003, our primary sources of liquidity consisted of $44.4
million in cash and cash equivalents and $2.1 million in short-term investments.
Net cash provided by operating activities was $13.9 million and $5.4
million for the six months ended June 30, 2003 and 2002, respectively. For the
first two quarters of 2003, net cash provided by operating activities resulted
primarily from our operating earnings, supplemented by depreciation and
amortization, a decrease in prepaid expenses and an increase in deferred
revenue, offset by a decrease in accounts payable and an increase in accounts
receivable. For the first two quarters of 2002, net cash provided by operating
activities resulted primarily from our operating earnings, supplemented by
depreciation and amortization, a decrease in prepaid expenses and an increase in
deferred revenue, offset by a decrease in accounts payable, increases in
accounts receivable and other assets, the benefit of a non-cash cumulative
change in accounting principle and a gain on the sale of an investment.
Net cash used in investing activities was $3.6 million and $969,000 for
the six months ended June 30, 2003 and 2002, respectively. For the first two
quarters of 2003, net cash used in investing activities was comprised primarily
of purchases of short-term investments, furniture, fixtures and equipment and an
intangible asset as well as the acquisition of a business, net of cash received,
offset by repayments of notes receivable and proceeds from the sale of
equipment. For the first two quarters of 2002, net cash used in investing
activities consisted primarily of purchases of furniture, fixtures and
equipment, offset by repayments of notes receivable and proceeds from the sale
of an investment.
Net cash provided by (used in) financing activities was $1.4 million
and ($73,000) for the six months ended June 30, 2003 and 2002, respectively. For
the first two quarters of 2003, net cash provided by financing activities was
comprised primarily of proceeds from the exercise of stock options and common
shares issued under our employee stock purchase plan, offset by repayments of
long-term debt and capital lease obligations. For the first quarter of 2002, net
cash used in financing activities was due to repayments of long-term debt and
capital lease obligations, offset by proceeds from the exercise of stock
options.
Based on our past performance and current expectations, we believe 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.
FINANCIAL COMMITMENTS
CAPITAL LEASING AND LOAN ARRANGEMENTS
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 approximated $524,000 and $847,000 as of June 30,
2003 and December 31, 2002, respectively, with installments due through 2006 at
fixed rates ranging from 3.4% to 8.8% per annum.
-17-
OPERATING LEASES
We lease certain facilities and equipment under non-cancelable
operating leases which expire at various dates through 2010. Future minimum
lease payments under operating leases as of June 30, 2003 for the remainder of
the fiscal year ending December 31, 2003 approximate $387,000.
Future minimum lease payments under non-cancelable operating leases
(with initial or remaining lease terms in excess of one year) are as follows (in
thousands):
Year Ending
December 31,
------------
2004 $ 695
2005 695
2006 708
2007 708
2008 708
Thereafter 708
------------
Total $ 4,222
============
FORWARD-LOOKING INFORMATION
In addition to historical information, the foregoing Management's
Discussion and Analysis of Financial Condition and Results of Operations
contains forward-looking statements. These forward-looking statements involve
risks, uncertainties and assumptions. The actual results may differ materially
from those anticipated in these forward-looking statements as a result of many
factors, including but not limited to those discussed below, the results of any
acquisition we may complete and the factors discussed in the section in this
Quarterly Report on Form 10-Q entitled "Quantitative and Qualitative Disclosures
About Market Risk". Readers are cautioned not to place undue reliance on these
forward-looking statements, which reflect management's opinions only as of the
date hereof. We undertake no obligation to revise or publicly release the
results of any revision to these forward-looking statements. Readers should
carefully review the risk factors described below, those identified in the "Risk
Factors" section of our Annual Report on Form 10-K filed with the Securities and
Exchange Commission ("SEC") on March 31, 2003 and the risk factors set forth in
other documents we file from time to time with the SEC.
Some factors that could cause actual results to differ materially from
those anticipated in these forward-looking statements include, but are not
limited to, our ability to:
o Sustain growth or profitability;
o Continue to maintain, expand and retain our customer base;
o Compete with existing or new providers of similar services with
regard to price, quality and functionality;
o Cost-effectively procure large quantities of telephone numbers in
desired locations in the United States and abroad;
o Adequately manage and plan for potentially burdensome regulation
of the telecommunications and/or the Internet industries, which
could adversely affect our business;
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;
-18-
o Successfully manage our cost structure, including but not limited
to our telecommunication and personnel related expenses;
o Utilize our federal and state net operating loss tax
carry-forwards which may be subject to limitations;
o Successfully adapt to technological changes in the messaging,
communications and document management industries;
o Successfully protect our intellectual property and avoid
infringing upon the proprietary rights of others;
o Maintain and manage relationships with marketing companies,
telecommunications carriers and network services providers (e.g.,
collocation and Internet broadband suppliers);
o Adequately manage growth in terms of managerial and operational
resources;
o Maintain and upgrade our systems and infrastructure to deliver
acceptable levels of service quality, accommodate increased
traffic, bill our customers and provide adequate 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.
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 substantially denominated in US Dollars. However, we
invest our cash primarily in high grade, short-term, interest-bearing
instruments. Our return on these instruments is subject to interest rate
fluctuations.
We do not have derivative financial instruments for hedging,
speculative or trading purposes.
Item 4. Controls and Procedures
- --------------------------------
Disclosure Controls and Procedures. The Company's management, with the
participation of the Company's President (principal executive officer) and Chief
Financial Officer (principal financial officer), has evaluated the effectiveness
of the Company's disclosure controls and procedures (as such term is defined in
Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as
amended (the "Exchange Act")) as of the end of the period covered by this
report. Based on such evaluation, the Company's President (principal executive
officer) and Chief Financial Officer (principal financial officer) have
concluded that, as of the end of such period, the Company's disclosure controls
and procedures are effective in recording, processing, summarizing and
reporting, on a timely basis, information required to be disclosed by the
Company in the reports that it files or submits under the Exchange Act.
Internal Control Over Financial Reporting. There have not been any
changes in the Company's internal control over financial reporting (as such term
is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the
fiscal quarter to which this report relates that have materially affected, or
are reasonably likely to materially affect, the Company's internal control over
financial reporting.
-19-
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 business, prospects,
financial position, results of operations or cash flows.
Item 4. Submission of Matters to a Vote of Security Holders
- ------------------------------------------------------------
Our 2003 Annual Meeting of Shareholders was held on May 7, 2003 in Los
Angeles, California. There were 11,243,113 shares of our common stock entitled
to be voted on March 27, 2003, the record date for the meeting. The following
matters were submitted to our shareholders for a vote at the Annual Meeting:
1. To elect the following five director nominees to serve for the
ensuing year and until their successors are elected. All nominees were
elected as directors with the following vote:
Nominee For Withheld or Abstained
------- --- ---------------------
Douglas Y. Bech 9,890,575 262,980
Robert J. Cresci 9,890,569 262,986
Richard S. Ressler 9,872,875 280,680
John F. Rieley 9,872,869 280,686
Michael P. Schulhof 9,890,575 262,980
2. To ratify the appointment of Deloitte & Touche LLP as our
independent auditors for fiscal 2003. This proposal was approved with
the following vote:
For Against Abstain Broker Non-Votes
--- ------- ------- ----------------
10,003,116 143,026 7,413 --
Item 6. Exhibits and Reports on Form 8-K
- -----------------------------------------
a. Exhibits:
EXHIBIT
NUMBER DESCRIPTION
------ -----------
31 Certificates of Chief Executive Officer and Chief Financial
Officer pursuant to Securities Exchange Act Rules 13a-15(e)
and 15d-15(e) as Adopted Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002 dated August 11, 2003.
32 Certificate of Chief Executive Officer and Chief Financial
Officer pursuant to section 18 U.S.C. section 1350 dated
August 11, 2003.
b. Reports on Form 8-K:
ITEM DESCRIPTION FILING DATE
---- ----------- -----------
7,9 Regulation FD disclosure regarding February 6, 2003
fourth quarter and fiscal year 2002
financial results, revised financial
estimates for first quarter and
fiscal year 2003, and February 2003
Investor Presentation.
7,9 Regulation FD disclosure regarding April 9, 2003
j2 Global's presentation at the
Sidoti & Company, LLC Seventh Annual
Emerging Growth Institutional
Investor Forum.
-20-
7,9 Regulation FD disclosure regarding April 22, 2003
first quarter 2003 financial
results, revised financial estimates
for second quarter and fiscal year
2003, and April 2003 Investor
Presentation.
7,9 Regulation FD disclosure regarding April 22, 2003
clarification of certain comments
made during the first quarter
earnings conference call.
7,9 Disclosure regarding integration of May 15, 2003
the Company's eFax(R) and May 15,
2003 jConnect(R) services with
Microsoft(R) Office 2003 software.
7,9 Regulation FD disclosure regarding May 16, 2003
sale of j2 Global common shares by
certain reporting officers.
7,9 Regulation FD disclosure regarding June 19, 2003
j2 Global's presentation at the
Thomas Weisel Partners Growth Forum
5.0 Conference.
ITEMS 2, 3 AND 5 ARE NOT APPLICABLE AND HAVE BEEN OMITTED.
-21-
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
j2 Global Communications, Inc.
Date: August 11, 2003 By: /s/ R. SCOTT TURICCHI
-------------------------------
R. Scott Turicchi
Chief Financial Officer
(Principal Financial Officer)
Date: August 11, 2003 By: /s/ GREGGORY KALVIN
-------------------------------
Greggory Kalvin
Chief Accounting Officer
(Principal Accounting Officer)
-22-
INDEX TO EXHIBITS
-----------------
EXHIBIT
NUMBER DESCRIPTION
------ -----------
31 Certificates of Chief Executive Officer and Chief Financial
Officer pursuant to Securities Exchange Act Rules 13a-15(e) and
15d-15(e) as Adopted Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002 dated August 11, 2003.
32 Certificate of Chief Executive Officer and Chief Financial
Officer pursuant to section 18 U.S.C. section 1350 dated August
11, 2003.
-23-