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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, 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
______________
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 (I.R.S. Employer
of incorporation or organization) Identification No.)
6922 Hollywood Boulevard
Suite 500
Los Angeles, California 90028
----------------------------------------
(Address of principal executive offices)
(323) 860-9200
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(Registrant's telephone number, including area code)
______________
Indicate by check mark whether the registrant (1) has filed all reports required
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes [X] No [_]
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 October 31, 2003, the registrant had outstanding 23,064,840 shares of
Common Stock, $0.01 par value, which is the only class of common or voting stock
of the registrant issued.
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j2 GLOBAL COMMUNICATIONS, INC.
FOR THE QUARTER ENDED SEPTEMBER 30, 2003
INDEX PAGE
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PART I. FINANCIAL INFORMATION
- -----------------------------
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
(unaudited) 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 14
Item 3. Quantitative and Qualitative Disclosures About Market Risk 20
Item 4. Controls and Procedures 20
PART II. OTHER INFORMATION
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Item 1. Legal Proceedings 22
Item 6. Exhibits and Reports on Form 8-K 22
Signatures 23
Index to Exhibits 24
2
PART I FINANCIAL INFORMATION
- ----------------------------
Item 1. Financial Statements
- ----------------------------
j2 GLOBAL COMMUNICATIONS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited, in thousands)
September 30, December 31,
2003 2002
------------ ------------
ASSETS
Cash and cash equivalents $ 46,313 $ 32,777
Short-term investments 8,213 --
Accounts receivable,
net of allowances of $336,000 and $233,000, respectively 5,858 5,082
Prepaid expenses and other current assets 2,279 1,408
------------ ------------
Total current assets 62,663 39,267
Furniture, fixtures and equipment, net 6,641 6,500
Goodwill and other purchased intangibles, net 17,961 17,324
Other assets 372 1,002
------------ ------------
Total assets $ 87,637 $ 64,093
============ ============
LIABILITIES & STOCKHOLDERS' EQUITY
Accounts payable and accrued expenses $ 3,590 $ 3,948
Deferred revenue 3,691 2,615
Current portion of long-term debt 1,256 595
------------ ------------
Total current liabilities 8,537 7,158
Long-term debt 334 252
------------ ------------
Total liabilities 8,871 7,410
------------ ------------
Total stockholders' equity 78,766 56,683
------------ ------------
Total liabilities and stockholders' equity $ 87,637 $ 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 Nine Months Ended
September 30, September 30,
--------------------------- ---------------------------
2003 2002 2003 2002
------------ ------------ ------------ ------------
Revenues:
Subscriber $ 17,806 $ 11,551 $ 48,567 $ 31,349
Advertising 681 783 1,902 2,314
Licensed services 416 169 679 526
------------ ------------ ------------ ------------
18,903 12,503 51,148 34,189
Cost of revenues 3,494 2,550 9,751 8,692
------------ ------------ ------------ ------------
Gross profit 15,409 9,953 41,397 25,497
------------ ------------ ------------ ------------
Operating expenses:
Sales and marketing 2,897 1,982 8,273 4,713
Research and development 1,006 747 3,055 2,279
General and administrative 4,085 3,372 11,296 10,144
------------ ------------ ------------ ------------
Total operating expenses 7,988 6,101 22,624 17,136
------------ ------------ ------------ ------------
Operating earnings 7,421 3,852 18,773 8,361
Interest and other income, net 126 62 269 387
------------ ------------ ------------ ------------
Earnings before income taxes
and cumulative effect of
change in accounting principle 7,547 3,914 19,042 8,748
Income tax expense 347 -- 862 --
------------ ------------ ------------ ------------
Earnings before cumulative
effect of change in
accounting principle 7,200 3,914 18,180 8,748
Cumulative effect of change in
accounting principle -- -- -- 225
------------ ------------ ------------ ------------
Net earnings $ 7,200 $ 3,914 $ 18,180 $ 8,973
============ ============ ============ ============
Net earnings per common share:
Basic $ 0.32 $ 0.18 $ 0.81 $ 0.42
Diluted $ 0.28 $ 0.16 $ 0.73 $ 0.38
Weighted average shares outstanding:
Basic 22,857,057 21,656,946 22,578,729 21,544,116
Diluted 25,493,305 24,479,474 24,990,025 23,679,576
See accompanying notes to condensed consolidated financial statements
4
j2 GLOBAL COMMUNICATIONS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited, in thousands)
Nine Months Ended September 30,
-------------------------------
2003 2002
------------ ------------
Cash flows from operating activities:
Net earnings $ 18,180 $ 8,973
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Depreciation and amortization 2,986 2,615
Non-cash income tax expense 726 --
Compensation in exchange for note reduction 130 130
Compensation in exchange for common stock -- 93
Gain on sale of investment -- (162)
Gain on repurchase of treasury stock -- (80)
Cumulative effect of change in accounting principle -- (225)
Decrease (increase) in:
Accounts receivable (557) (1,119)
Interest receivable (27) (28)
Prepaid expenses 542 374
Other assets (139) (299)
(Decrease) increase in:
Accounts payable (395) (792)
Deferred revenue 1,026 549
------------ ------------
Net cash provided by operating activities 22,472 10,029
------------ ------------
Cash flows from investing activities:
Purchases of short-term investments, net (8,213) --
Purchase of furniture, fixtures and equipment (2,660) (1,780)
Purchase of intangible asset (200) --
Acquisition of a business, net of cash received (975) --
Payment of accrued exit costs -- (100)
Repayments of notes receivable, net 539 190
Proceeds from sale of equipment 73 --
Proceeds from sale of an investment -- 170
------------ ------------
Net cash used in investing activities (11,436) (1,520)
------------ ------------
Cash flows from financing activities:
Issuance of common stock under employee
stock purchase plan 270 --
Exercise of stock options 2,906 798
Repayment of long-term debt and capital leases, net (676) (954)
------------ ------------
Net cash provided by (used in) financing activities 2,500 (156)
------------ ------------
Net increase in cash and cash equivalents 13,536 8,353
Cash and cash equivalents at beginning of year 32,777 19,087
------------ ------------
Cash and cash equivalents at end of period $ 46,313 $ 27,440
============ ============
See accompanying notes to condensed consolidated financial statements
5
j2 GLOBAL COMMUNICATIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 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.,
dotCOM, Ltd. and Driverworks.com Development Corporation. 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 Reports on Form
10-Q filed with the SEC on May 9, 2003 and August 13, 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 - STOCK SPLIT
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 been adjusted in the accompanying financial statements and related
notes to reflect this split for all periods presented.
NOTE 4 - 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
6
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
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 10 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 adoption of SFAS No. 149 in
the third quarter of fiscal 2003 did not have a material effect on the Company's
financial condition, results of operations or liquidity.
NOTE 5 - 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 life.
The Company's advertising revenues consist primarily of revenues derived by
delivering email messages and presenting banners 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
for impairment whenever events or changes in circumstances indicate that the
carrying amount of
7
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, second and third
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 nine months ended
September 30, 2003. Net long-lived assets amounted to approximately $7.5 million
as of September 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,
second and third 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 nine
months ended September 30, 2003. Net goodwill and a trade name with an
indefinite useful life amounted to approximately $16.5 million as of September
30, 2003.
VALUATION OF DEFERRED TAX ASSETS
Income taxes are accounted for under the asset and liability method as
described in SFAS No. 109 "Accounting For Income Taxes". 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. See Note 9 to the accompanying condensed
consolidated financial statements, as well as Item 2 of this Form 10-Q
(Management's Discussion and Analysis of Financial Condition and Results of
Operations), for a further discussion of income taxes and the valuation of
deferred tax assets.
NOTE 6 - 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 nine months ended September 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 Nine Months Ended
September 30, September 30,
------------------------- -------------------------
2003 2002 2003 2002
----------- ----------- ----------- -----------
Numerator for basic and diluted net
earnings per common share:
Net earnings $ 7,200 $ 3,914 $ 18,180 $ 8,973
----------- ----------- ----------- -----------
Denominator:
Weighted average outstanding
shares of common stock 22,857,057 21,656,946 22,578,729 21,544,116
Dilutive effect of:
Employee stock options 2,312,510 2,595,584 2,120,686 2,087,638
Warrants 323,738 226,944 290,610 47,822
----------- ----------- ----------- -----------
Common stock and
common stock equivalents 25,493,305 24,479,474 24,990,025 23,679,576
----------- ----------- ----------- -----------
Net earnings per share:
Basic $ 0.32 $ 0.18 $ 0.81 $ 0.42
=========== =========== =========== ===========
Diluted $ 0.28 $ 0.16 $ 0.73 $ 0.38
=========== =========== =========== ===========
NOTE 7 - ACQUISITIONS
On January 30, 2003, the Company acquired dotCOM, Ltd., d/b/a Cyberbox, a
Hong Kong-based company, for approximately $175,000, net of cash received,
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.
On September 15, 2003, the Company acquired Driverworks.com Development
Corporation ("Driverworks"), d/b/a M4Internet, a California-based company that
provides technology and services for personalized, permission-based email
messaging, for approximately $800,000, net of cash received, subject to
adjustment based upon certain earn-out provisions. The transaction has been
accounted for under the purchase method and, accordingly, the results of
operations of Driverworks 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 the net assets acquired amounted to approximately $600,000,
without giving effect to potential purchase price adjustments. As of the date of
this report, the Company has not determined the allocation of excess purchase
price between goodwill and identifiable intangible assets.
NOTE 8 - 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 nine-month periods ended September 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
10
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 nine-month periods ending September 30, 2003 and 2002:
Three Months Ended September 30, Nine Months Ended September 30,
2003 2002 2003 2002
-------------- -------------- -------------- --------------
Basic net earnings before
cumulative effect of a change
in accounting principle $ 0.32 $ 0.18 $ 0.81 $ 0.41
Cumulative effect of a change in
accounting principle -- -- -- 0.01
-------------- -------------- -------------- --------------
Basic net earnings per common share $ 0.32 $ 0.18 $ 0.81 $ 0.42
============== ============== ============== ==============
Diluted net earnings before
cumulative effect of a change in
accounting principle $ 0.28 $ 0.16 $ 0.73 $ 0.37
Cumulative effect of a change in
accounting principle -- -- -- 0.01
-------------- -------------- -------------- --------------
Diluted net earnings per common share $ 0.28 $ 0.16 $ 0.73 $ 0.38
============== ============== ============== ==============
Weighted average shares outstanding:
Basic 22,857,057 21,656,946 22,578,729 21,544,116
============== ============== ============== ==============
Diluted 25,493,305 24,479,474 24,990,025 23,679,576
============== ============== ============== ==============
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 3 years to 8 years on a straight-line basis. Amortization expense,
included in general and administrative expense, during the three and nine-month
periods ended September 30, 2003 approximated $46,000 and $102,000,
respectively. Amortization expense for the fiscal years 2003 through 2007 is
estimated to approximate $150,000 per year and for fiscal year 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. During the nine months
ended September 30, 2003, the Company decreased the carrying amount of goodwill
by approximately $88,000 primarily as a result of certain purchase price
adjustments that effected existing goodwill, offset by the acquisition of
dotCOM, Ltd. As of September 30, 2003, intangible assets with finite lives,
goodwill and trade name balances, net of accumulated amortization were as
follows (in thousands):
11
Amortization Historical Accumulated
period cost amortization Net
------------ ---------- ------------ ---------
INTANGIBLE ASSETS SUBJECT TO AMORTIZATION
Acquired product technology rights:
Patent 8 years $ 1,005 $ 169 $ 836
Other 3 years 59 51 8
INTANGIBLE ASSETS NOT SUBJECT TO AMORTIZATION
Goodwill $ 23,430 $ 8,181 $ 15,249
Indefinite-lived trade name 1,500 $ 232 1,268
OTHER
Unallocated - refer to Note 7 $ 600 -- 600
--------
Goodwill and other purchased intangibles, net $ 17,961
========
NOTE 9 - INCOME TAXES
FEDERAL INCOME TAXES
As of September 30, 2003, the Company had federal net operating loss
carry-forwards ("NOLs") and federal tax credits of approximately $103 million
and $1 million, respectively. As a result of these NOLs and tax credits, the
Company has neither accrued nor paid federal income taxes since its inception.
The Tax Reform Act of 1986 imposes 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 its
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 September 30, 2003 the Company estimated that
approximately $41 million of the federal NOL and $1 million of federal tax
credits would be available for use before their expiration in the year 2021.
State Income Taxes
As of September 30, 2003, the Company had State of California NOLs of
approximately $43 million, net of "ownership change" restrictions imposed by the
Tax Reform Act of 1986 referred to above. In September 2002, the State of
California enacted legislation deferring the use of NOL carry-forwards until the
2004 tax year. The Company anticipates utilizing these state NOLs before they
expire in the year 2013. As a result, state income tax expense for the three and
nine-month periods ending September 30, 2003 approximated $347,000 and $862,000,
respectively, which amounts consist of apportioned California taxes offset by
certain state research and development tax credits.
Deferred Tax Assets
The Company's federal and state NOLs and other deferred tax assets as of
September 30, 2003 were fully reserved by a valuation allowance. Based upon its
expected continued profitability in the fourth quarter of 2003 and, based on
current information, for the foreseeable future, the Company anticipates that it
will meet the "more likely-than-not" criteria for recognition of deferred tax
assets as described in SFAS No. 109 "Accounting For Income Taxes". As a result,
the Company anticipates reducing its valuation allowance and recognizing a
substantial portion of its remaining federal and state NOLs and other tax
credits as a tax asset in the fourth quarter of 2003.
12
NOTE 10 - 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):
Three Months Ended Nine Months Ended
September 30, September 30,
2003 2002 2003 2002
---------- ---------- ---------- ----------
Net earnings, as reported $ 7,200 $ 3,914 $ 18,180 $ 8,973
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 (531) (504) (1,420) (1,143)
---------- ---------- ---------- ----------
Pro forma net earnings $ 6,669 $ 3,410 $ 16,760 $ 7,830
========== ========== ========== ==========
Basic net earnings per common share:
As reported $ 0.32 $ 0.18 $ 0.81 $ 0.42
========== ========== ========== ==========
Pro forma $ 0.29 $ 0.16 $ 0.74 $ 0.36
========== ========== ========== ==========
Diluted net earnings per common share:
As reported $ 0.28 $ 0.16 $ 0.73 $ 0.38
========== ========== ========== ==========
Pro forma $ 0.26 $ 0.14 $ 0.67 $ 0.33
========== ========== ========== ==========
13
NOTE 11 - LEASING LINE OF CREDIT
In the third quarter of 2003, the Company entered into an equipment leasing
line of credit which permits borrowings up to $2.5 million. As of September 30,
2003, amounts drawn down under this credit line were $236,000, which are
included in long-term debt in the accompanying financial statements. The credit
line bears interest at 5.8% subject to adjustment based on the 36-month Treasury
rate and is secured by the equipment being financed. Borrowings under this
credit line are subject to repayment terms of 36 months commencing from the date
of each draw-down.
NOTE 12 - SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for interest during the nine-month periods ended September 30,
2003 and 2002 approximated $40,000 and $71,000, respectively, substantially all
of which related to long-term debt and capital leases.
Cash paid for income taxes during the nine-month periods ended September
30, 2003 and 2002 approximated $300,000 and zero, respectively.
During the nine-month periods ended September 30, 2003 and 2002, the
Company entered into loan arrangements approximating $1.2 million and $695,000,
respectively, to finance certain corporate insurance policies.
During the nine months ended September 30, 2003 and 2002, the Company
entered into capital lease arrangements for certain computer equipment and
software approximating $236,000 and $543,000, respectively.
Through the nine months ended September 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 $726,000.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
- -------------------------------------------------------------------------------
OF OPERATIONS
- -------------
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) ProTM, Documagix(R), Hotsend(R) and recently-acquired
M4InternetTM.
We deliver our services through our global telephony/Internet Protocol
("IP") network, which covers more than 1,100 cities in 20 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 September 30, 2003, we had more
than 5.5 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.
WEB CHANNEL
We currently generate 70% of our total revenues through our Web channel,
from a combination of Web subscriber and advertising revenues. This channel
markets our eFax(R), jConnect(R) and Consensus(R) branded services through the
Web sites eFax.com and j2.com, and also advertises to our non-paid subscribers
(sometimes referred to as "Free" or "advertising-supported" subscribers).
Our "advertising-supported" subscribers also serve as a source of new paid
subscribers, for both our Web and Corporate channels. 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 both paid
and non-paid subscribers.
Subscriber Revenues. We generate subscriber revenues through marketing our Web
channel services primarily to individuals and small businesses through a
combination of Internet-based marketing and advertising, an in-house
14
telesales group and word-of-mouth. More than three-quarters of our Web channel
subscriber revenues are comprised of recurring subscription fees, with the
balance resulting from usage and activation fees. As of September 30, 2003, we
had approximately 317,000 telephone numbers deployed to paid Web channel
subscribers.
Advertising Revenues. Web channel advertising revenues are generated from
advertising primarily to non-paid subscribers. As of September 30, 2003, we had
approximately 5.1 million telephone numbers deployed to these
advertising-supported Web channel subscribers.
CORPORATE CHANNEL
We currently generate 29% of our total revenues through our Corporate
channel. This channel markets our eFax Corporate(R) branded services to midsize
and large businesses, as well as government agencies, through an in-house direct
sales force. In September 2003, we acquired M4InternetTM, which provides
technology and services for personalized, permission-based email messaging to
midsize and large businesses through an in-house direct sales force. The
Corporate channel also markets our eFax BroadcastTM and jBlast(R) services
through an outsourced telesales organization. More than two-thirds of our
Corporate channel revenues are generated by usage fees with the balance
resulting from recurring subscription and activation fees. Usage makes up a
significant portion of revenues generated by our Corporate channel; as a result,
this channel's revenues are subject to fluctuations based on the market
conditions faced by our corporate customers. For example, we have experienced
fluctuations in usage levels from customers in the real estate industry,
particularly those in the mortgage refinancing sector, due to fluctuations in
mortgage rates. As of September 30, 2003, we had approximately 63,000 telephone
numbers deployed to paying Corporate channel subscribers.
LICENSED SERVICES CHANNEL
We currently generate 1% of our total revenues through our Licensed
Services channel. This channel seeks to integrate our services and network
capabilities on an opportunistic basis into third-party product offerings, to
sell our software products and to license our intellectual property. The
majority of our Licensed Services channel revenues currently result from the
sale of our recently released PaperMaster(R) ProTM desktop-based document
management software.
RESULTS OF OPERATIONS FOR THE THREE AND NINE-MONTH PERIODS ENDED SEPTEMBER 30,
2003 AND 2002
REVENUE ITEMS
Subscriber Revenues. Subscriber revenues, which accounted for more than 94% of
our total revenues for each of the three and nine-month periods ended September
30, 2003, are comprised primarily of monthly recurring subscription fees and
usage based fees. Subscriber revenues were $17.8 million and $11.6 million for
the three months ended September 30, 2003 and 2002, respectively. For the nine
months ended September 30, 2003 and 2002, subscriber revenues were $48.6 million
and $31.3 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 channels, an increase in usage levels in our
Corporate channel and a price increase effective mid-June 2003 for new Web
channel customers. The increases in paid subscribers in our Web channel were the
result of new Web sign-ups derived from word-of-mouth, conversions of existing
advertising-supported customers to paid services as a result of our "lifecycle
management" program, a decrease in cancellations and increased Internet
advertising . The increases in paid subscribers in our Corporate channel were
the result of new customer accounts generated by our direct sales force and DID
additions to the existing Corporate channel customer base. Our number of
subscribers (both paid and advertising-supported) was greater than 5.5 million
and 4.6 million as of September 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 to new subscribers
of our Web channel services. In mid-September 2003, we began applying the price
increase to our existing base of Web channel customers. The monthly subscription
fee for the eFax Plus service was raised from $9.95 to $12.95, and the
activation fee increased from $10.00 to $12.95. For the jConnect Premier
service, the monthly subscription fee was increased from $12.50 to $15.00, and
the activation fee remained unchanged at $15.00. Implementation of this price
increase to our
15
existing Web channel customers is anticipated to extend over a period of twelve
months, with the majority of the increases occurring within the first six
months. As of September 30, 2003, we estimate that approximately 10% of our Web
channel customers were subject to this increased pricing and, as such, the price
increase had an insignificant impact on total third quarter Web channel
revenues.
Advertising. We generate advertising revenues by delivering email messages and
presenting banners on behalf of advertisers to our customers primarily those in
our advertising-supported Web channel base. Advertising revenues, a component of
our Web channel, accounted for approximately 5% of our total revenues for each
of the three and nine-month periods ended September 30, 2003. For the three
months ended September 30, 2003 and 2002, advertising revenues were $681,000 and
$783,000, respectively. For the nine months ended September 30, 2003 and 2002,
advertising revenues were $1.9 million and $2.3 million, respectively. The
decreases in advertising revenues were due, among other reasons, to a weaker
email advertising market demand inherent in the first nine months of 2003
compared to the first nine months of 2002, which resulted in less advertising
spend by our advertisers and a slight decrease in advertising rates. We expect
Internet email advertising market demand for the remainder of 2003 to remain
comparable to that of the third quarter of 2003.
Licensed Services. Licensed Services channel revenues, which accounted for
approximately 1% of our total revenues for each of the three and nine-month
periods ended September 30, 2003, consisted primarily of revenues from licensing
our PaperMaster(R) ProTM document management software. For the three and nine
months ended September 30, 2002, our Licensed Services channel consisted
primarily of hardware and software royalties and revenues from licensing our
PaperMaster(R) document management software products.
Revenues by Channel. For each of the three and nine-month periods ended
September 30, 2003, our Web, Corporate and Licensed Services channel revenues
represented approximately 70%, 29% and 1% of our total revenues, respectively.
For the three and nine-month periods ended September 30, 2002, our Web,
Corporate and Licensed Services channel revenues represented approximately 73%,
26% and 1% of our total 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 were $3.5 million,
or 18% of total revenues, and $2.6 million, or 20% of total revenues, for the
three months ended September 30, 2003 and 2002, respectively. For the nine
months ended September 30, 2003 and 2002, cost of revenues were $9.8 million, or
19% of total revenues, and $8.7 million, or 25% of total revenues, respectively.
The absolute dollar increases in cost of revenues corresponded to an increase in
subscription and usage revenues across both the Web and Corporate channels. The
decreases in cost of revenues as a percentage of total revenues were a result of
increased economies of scale in our infrastructure and 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 Web site
advertising placements at a fixed monthly cost, paid search engine placements
priced on a cost-per-click basis, and cost-per-click and impression-based
advertising arrangements, all with an array of online service providers. On an
ongoing basis, we assess the effectiveness of these relationships in acquiring
new customers at acceptable costs.
Sales and marketing expenses were $2.9 million, or 15% of total revenues, and
$2.0 million, or 16% of total revenues, for the three months ended September 30,
2003 and 2002, respectively. For the nine months ended September 30, 2003 and
2002, sales and marketing expenses were $8.3 million, or 16% of total revenues,
and $4.7 million, or 14% of total revenues, respectively. The 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.
16
Amounts expensed under agreements with online service providers are
included in sales and marketing expenses. For the three months ended September
30, 2003 and 2002, total amounts expensed under these agreements were $375,000
and $225,000, respectively. For the nine months ended September 30, 2003 and
2002, total amounts expensed under these agreements were $1,125,000 and
$300,000, respectively.
Research and Development. Our research and development costs consist primarily
of personnel related costs. Research and development costs were $1.0 million, or
5% of total revenues, and $747,000, or 6% of total revenues, for the three
months ended September 30, 2003 and 2002, respectively. For the nine months
ended September 30, 2003 and 2002, research and development costs were $3.1
million, or 6% of total revenues, and $2.3 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, reliability and
security of our infrastructure to accommodate our growing Web and Corporate
channel customer bases and to serve our increasingly sophisticated Corporate
channel customer base. Research and development costs as a percentage of total
revenues 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 nine-month periods
ended September 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 $46,000 and $19,000 for the three months ended September
30, 2003 and 2002, respectively, and $102,000 and $150,000 for the nine months
ended September 30, 2003 and 2002, respectively. The $150,000 as of September
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 8 to the accompanying condensed consolidated
financial statements for a further discussion of goodwill and intangible assets.
Interest and Other Income. For the three and nine-month periods ended September
30, 2003, interest and other income consisted primarily of interest earned on
cash, cash equivalents and short-term investments. For the three and nine-month
periods ended September 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 $126,000 and $62,000 for the
three months ended September 30, 2003 and 2002, respectively, and $269,000 and
$387,000 for the nine months ended September 30, 2003 and 2002, respectively.
The increase in interest and other income for the three months ended September
30, 2003 compared to the three months ended September 30, 2002 was a result of
higher overall cash balances and the composition of slightly higher yielding
investments during third quarter of 2003. The decrease in interest and other
income for the nine months ended September 30, 2003 compared to the nine months
ended September 30, 2002 was primarily due to a gain on the sale of an
investment approximating $162,000 occurring in the first half of 2002.
Income Taxes. Income tax expense amounted to approximately $347,000 and zero for
the three months ended September 30, 2003 and 2002, respectively. For the nine
months ended September 30, 2003 and 2002, income tax expense was $862,000 and
zero, respectively. In September 2002, the State of California enacted
legislation deferring the use of NOL carry-forwards until the 2004 tax year. As
a result, 2003 state income tax expense of $347,000 and $862,000 for the three
and nine-month periods ended September 30, 2003 and 2002, respectively,
consisted 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.
17
As of September 30, 2003, we had federal and state (California) net
operating loss carry-forwards ("NOLs") of approximately $103 million and $43
million, respectively. In addition, we had federal tax credits approximating $1
million.
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
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 September 30, 2003, we estimated that approximately $41 million of the
federal NOL and $1 million of the federal tax credits would be available for use
before their expiration in the year 2021 and $43 million of the state NOL would
be available for use before its expiration in the year 2013.
Based upon our expected continued profitability in the fourth quarter of
2003 and, based on current information, for the foreseeable future, we
anticipate that we will meet the "more likely-than-not" criteria for recognition
of deferred tax assets as described in SFAS No. 109 "Accounting For Income
Taxes". As a result, we anticipate reducing the valuation allowance and
recognizing a substantial portion of its remaining federal and state NOLs and
other tax credits as a tax asset in the fourth quarter of 2003. We believe that
a reduction in the valuation allowance at that time will result in a one-time
income tax benefit recorded in the fourth quarter of 2003 ranging from $9
million to $13 million, or $0.35 to $0.50 per fully diluted share. Assuming this
takes place, beginning in the first quarter of 2004 and continuing into the
future, we expect to reflect both federal and state income tax expense at a rate
no greater than 40%; however, the actual tax rate accrual for 2004 and beyond
will depend on several factors, including, but not limited to, tax rates and the
relative composition of our domestic and international business.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 2003, our primary sources of liquidity consisted of $46.3
million in cash and cash equivalents and $8.2 million in short-term investments.
Net cash provided by operating activities was $22.5 million and $10.0
million for the nine months ended September 30, 2003 and 2002, respectively. For
the first three quarters of 2003 and 2002, net cash provided by operating
activities resulted primarily from our operating earnings and depreciation and
amortization, offset by changes in assets and liabilities.
Net cash used in investing activities was $11.4 million and $1.5 million
for the nine months ended September 30, 2003 and 2002, respectively. For the
first three quarters of 2003, net cash used in investing activities was
comprised primarily of purchases of short-term investments and furniture,
fixtures and equipment. For the first three quarters of 2002, net cash used in
investing activities consisted primarily of purchases of furniture, fixtures and
equipment.
Net cash provided by (used in) financing activities was $2.5 million and
($156,000) for the nine months ended September 30, 2003 and 2002, respectively.
For the first three quarters of 2003 and 2002, net cash provided by financing
activities was comprised primarily of proceeds from the exercise of stock
options, offset by net repayments of long-term debt and capital lease
obligations.
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 typically
secured by the related assets. Our financing for insurance costs is unsecured.
Amounts due under these arrangements approximated $1.6 million and $847,000 as
of September 30, 2003 and December 31, 2002, respectively, with installments due
through 2006 at fixed rates ranging from 3.4% to 8.8% per annum.
18
In the third quarter of 2003, we entered into an equipment leasing line of
credit which permits borrowings up to $2.5 million. As of September 30, 2003,
amounts drawn down under this credit line were $236,000, which is included in
long-term debt in the accompanying financial statements. The credit line bears
interest at 5.8% subject to adjustment based on the 36-month Treasury rate and
is secured by the equipment being financed. Borrowings under this credit line
are subject to repayment terms of 36 months commencing from the date of each
draw-down.
Operating Leases
We lease certain facilities and equipment under non-cancelable operating
leases which expire at various dates through 2010. For the remainder of fiscal
year 2003, minimum lease payments under operating leases as of approximate
$195,000.
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;
19
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.
In addition, a material amount of the Company's Corporate channel revenues
are generated from customers in the real estate industry, particularly those in
the mortgage refinancing sector. As a result, the Company's Corporate channel
usage revenues can fluctuate based on changes in mortgage interest rates.
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.
20
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.
21
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 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 November 11, 2003.
32 Certificate of Chief Executive Officer and Chief Financial
Officer pursuant to section 18 U.S.C. section 1350 dated
November 11, 2003.
b. Reports on Form 8-K:
Item Description Filing Date
---- ----------- -----------
7,9 Regulation FD disclosure regarding second July 22, 2003
quarter 2003 financial results, revised
financial estimates for third quarter and
fiscal year 2003, and July 2003 Investor
Presentation.
7,9 Regulation FD disclosure regarding July 22, 2003
clarification of certain comments made
during the second quarter earnings
conference call.
7,9 Regulation FD disclosure announcing that August 8, 2003
j2's Board of Directors approved a
two-for-one stock split, to be effected
in the form of a stock dividend.
7,9 Regulation FD disclosure announcing September 9, 2003
that j2 was awarded a patent for its
messaging network architecture.
7,9 Regulation FD disclosure regarding the September 11, 2003
Company's intentions to apply a price
increase to its existing Web channel
customer base over a twelve month period.
Items 2, 3, 4 and 5 are not applicable and have been omitted.
22
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: November 11, 2003 By: /s/ R. SCOTT TURICCHI
-----------------------------
R. Scott Turicchi
Chief Financial Officer
(Principal Financial Officer)
Date: November 11, 2003 By: /s/ GREGGORY KALVIN
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Greggory Kalvin
Chief Accounting Officer
(Principal Accounting Officer)
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INDEX TO EXHIBITS
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Exhibit
Number Description
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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 November 11, 2003.
32 Certificate of Chief Executive Officer and Chief Financial
Officer pursuant to section 18 U.S.C. section 1350 dated
November 11, 2003.
24