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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_____________
FORM 10-Q
_____________
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2004
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
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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 15, 2004, the registrant had 23,241,495 shares of Common Stock
outstanding.
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j2 GLOBAL COMMUNICATIONS, INC.
FOR THE QUARTER ENDED JUNE 30, 2004
INDEX PAGE
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PART I. FINANCIAL INFORMATION
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Item 1. Financial Statements 3
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 10
Item 3. Quantitative and Qualitative Disclosures About Market Risk 17
Item 4. Controls and Procedures 17
PART II. OTHER INFORMATION
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Item 1. Legal Proceedings 18
Item 4. Submission of Matters to a Vote of Security Holders 18
Item 6. Exhibits and Reports on Form 8-K 19
Signatures 20
Index of Exhibits 21
Exhibit 31(a)
Exhibit 31(b)
Exhibit 32(a)
Exhibit 32(b)
-2-
PART I. FINANCIAL INFORMATION
- ---------------------------------
Item 1. Financial Statements
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j2 GLOBAL COMMUNICATIONS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
June 30, December 31,
2004 2003
------------ ------------
(Unaudited)
ASSETS
Cash and cash equivalents $ 50,925 $ 46,882
Short-term investments 5,219 8,539
Accounts receivable,
net of allowances of $416 and $239, respectively 8,059 5,877
Prepaid expenses and other current assets 2,618 2,571
Deferred income taxes 9,706 10,004
------------ ------------
Total current assets 76,527 73,873
Long-term investments 18,026 8,408
Property and equipment, net 6,921 6,594
Goodwill 19,104 15,616
Other purchased intangibles, net 8,613 2,320
Other assets 294 329
Deferred income taxes -- 5,716
------------ ------------
Total assets $ 129,485 $ 112,856
============ ============
LIABILITIES & STOCKHOLDERS' EQUITY
Accounts payable and accrued expenses $ 5,016 $ 4,010
Deferred revenue 5,345 4,698
Current portion of long-term debt and capital leases 553 1,022
------------ ------------
Total current liabilities 10,914 9,730
Long-term debt and capital leases 260 221
------------ ------------
Total liabilities 11,174 9,951
Total stockholders' equity 118,311 102,905
------------ ------------
Total liabilities and stockholders' equity $ 129,485 $ 112,856
============ ============
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,
2004 2003 2004 2003
------------ ------------ ------------ ------------
Revenues:
Subscriber $ 25,063 $ 16,307 $ 47,125 $ 30,761
Advertising 647 609 1,408 1,221
Licensing and Other 121 121 240 263
------------ ------------ ------------ ------------
25,831 17,037 48,773 32,245
Cost of revenues 4,063 3,247 7,703 6,257
------------ ------------ ------------ ------------
Gross profit 21,768 13,790 41,070 25,988
------------ ------------ ------------ ------------
Operating expenses:
Sales and marketing 4,767 2,866 8,546 5,376
Research, development and engineering 1,264 1,023 2,314 2,049
General and administrative 4,734 3,743 9,216 7,211
------------ ------------ ------------ ------------
Total operating expenses 10,765 7,632 20,076 14,636
------------ ------------ ------------ ------------
Operating earnings 11,003 6,158 20,994 11,352
Interest and other income, net 352 69 538 143
------------ ------------ ------------ ------------
Earnings before income taxes 11,355 6,227 21,532 11,495
Income tax expense 3,866 280 7,644 515
------------ ------------ ------------ ------------
Net earnings $ 7,489 $ 5,947 $ 13,888 $ 10,980
============ ============ ============ ============
Net earnings per common share:
Basic $ 0.32 $ 0.26 $ 0.60 $ 0.49
Diluted $ 0.29 $ 0.24 $ 0.54 $ 0.44
Weighted average shares outstanding:
Basic 23,211,954 22,619,854 23,166,504 22,455,428
Diluted 25,584,617 25,203,170 25,524,611 24,880,270
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,
2004 2003
------------ ------------
Cash flows from operating activities:
Net earnings $ 13,888 $ 10,980
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Depreciation and amortization 2,165 1,934
Compensation in exchange for note reduction 87 87
Tax benefit of non-qualifying stock option exercises 1,013 203
Deferred income taxes 6,013 --
Decrease (increase) in:
Accounts receivable (1,819) (107)
Interest receivable (48) 6
Prepaid expenses 677 487
Other assets (295) (99)
(Decrease) increase in:
Accounts payable 975 (490)
Deferred revenue 640 849
------------ ------------
Net cash provided by operating activities 23,296 13,850
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Cash flows from investing activities:
Purchase of investments (6,222) (2,079)
Purchase of property and equipment (1,761) (1,714)
Proceeds from sale of equipment -- 73
Acquisition of businesses, net of cash received (6,198) (175)
Purchase of intangible assets (4,819) (200)
Repayments of notes receivable, net -- 498
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Net cash used in investing activities (19,000) (3,597)
------------ ------------
Cash flows from financing activities:
Issuance of common stock under employee
stock purchase plan 211 178
Exercise of stock options and warrants 367 1,849
Repayment of long-term debt and capital leases (834) (629)
------------ ------------
Net cash (used in) provided by financing activities (256) 1,398
------------ ------------
Effect of exchange rate on cash and cash equivalents 3 --
------------ ------------
Net increase in cash and cash equivalents 4,043 11,651
Cash and cash equivalents at beginning of period 46,882 32,777
------------ ------------
Cash and cash equivalents at end of period $ 50,925 $ 44,428
============ ============
See accompanying notes to condensed consolidated financial statements
-5-
j2 GLOBAL COMMUNICATIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2004
(UNAUDITED)
NOTE 1 - BASIS OF PRESENTATION
j2 Global Communications, Inc. ("j2 Global" or the "Company") is a
Delaware corporation founded in 1995. The Company provides outsourced,
value-added messaging and communications services to individuals and businesses
throughout the world. It offers fax, voicemail and email solutions, unified
messaging & communications services, document management solutions and
conference calling services. j2 Global markets its services principally under
the brand names eFax(R), jConnect(R), JFAX(R), eFax Corporate(R), jBlast(R),
eFax BroadcastTM, PaperMaster(R), ConsensusTM, M4 InternetTM, ProtoFax(R) and
Electric MailTM.
The consolidated financial statements include the accounts of j2 Global
and its direct, indirect, domestic and international wholly-owned subsidiaries.
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 (consisting of normal recurring adjustments) considered
necessary for a fair presentation have been reflected in these condensed
consolidated financial statements. These consolidated financial statements
should be read in conjunction with the audited financial statements and related
notes for the year ended December 31, 2003 included in the Company's Annual
Report on Form 10-K filed with the SEC on March 15, 2004.
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.
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. All share numbers and per
share amounts contained in the accompanying financial statements and related
notes have been retroactively restated to reflect this change in the Company's
capital structure.
NOTE 2 - ACCOUNTING FOR STOCK OPTIONS
The Company applies the intrinsic value-based method of accounting
prescribed by Accounting Principles Board ("APB") Opinion No. 25, "Accounting
for Stock Issued to Employees", and related interpretations to account for its
fixed plan stock options. These interpretations include Financial Accounting
Standards Board ("FASB") Interpretation No. 44, "Accounting for Certain
Transactions Involving Stock Compensation an Interpretation of APB Opinion No.
25", issued in March 2000. 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 FASB Statement ("SFAS") No. 123, "Accounting for Stock-Based
Compensation", and SFAS No. 148, "Accounting for Stock-Based
Compensation-Transition and Disclosure", which is 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.
-6-
The Company accounts for option grants to non-employees using the
guidance of SFAS No. 123, as amended by SFAS No. 148, and Emerging Issues Task
Force ("EITF") Issue No. 96-18, "Accounting for Equity Instruments That Are
Issued to Other Than Employees for Acquiring, or in Conjunction with Selling,
Goods or Services." 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.
Under the intrinsic value method, no compensation cost using the
intrinsic value method has been recognized for 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:
Three Months Ended June 30, Six Months Ended June 30,
2004 2003 2004 2003
------------ ------------ ------------ ------------
(In thousands, except per share data)
Net earnings, as reported $ 7,489 $ 5,947 $ 13,888 $ 10,980
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 effect (336) (487) (823) (889)
------------ ------------ ------------ ------------
Pro forma net earnings $ 7,153 $ 5,460 $ 13,065 $ 10,091
============ ============ ============ ============
Basic net earnings per common share:
As reported $ 0.32 $ 0.26 $ 0.60 $ 0.49
============ ============ ============ ============
Pro forma $ 0.31 $ 0.24 $ 0.56 $ 0.45
============ ============ ============ ============
Diluted net earnings per common share:
As reported $ 0.29 $ 0.24 $ 0.54 $ 0.44
============ ============ ============ ============
Pro forma $ 0.28 $ 0.22 $ 0.51 $ 0.41
============ ============ ============ ============
NOTE 3 - USE OF ESTIMATES
The preparation of financial statements in accordance 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 net revenue 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 factors that
management believes to be reasonable under the circumstances, the results of
which form the basis for making judgments about the carrying value of assets and
liabilities that are not readily apparent from other sources. Actual results
could differ from those estimates.
NOTE 4 - RECENT ACCOUNTING PRONOUNCEMENTS
In January 2003, the FASB issued Interpretation No. 46, "Consolidation
of Variable Interest Entities - an Interpretation of ARB No. 51" ("FIN 46"). FIN
46 requires that variable interest entities be consolidated by a company if that
company absorbs a majority of the entity's expected losses, receives a majority
of its expected residual returns, or both, as a result of holding a variable
interest. In December 2003, the FASB issued FIN 46R, which made certain
amendments to FIN 46. The Company does not have any variable interest entities
and the adoption of FIN 46 did not have a material effect on the Company's
financial condition, results of operations or liquidity.
-7-
In March 2004, the EITF reached a consensus on Issue No. 03-1, "The
Meaning of Other-Than-Temporary Impairment and Its Application to Certain
Investments" ("EITF 03-1"). EITF 03-1 provides guidance for determining when an
investment is other-than-temporarily impaired to be applied in reporting periods
beginning after June 15, 2004 and contains disclosure requirements effective in
annual financial statements for fiscal years ending after December 15, 2003 for
investments accounted for under SFAS Nos. 115 and 124. For all other investments
within the scope of this Issue, the disclosures are effective for fiscal years
ending after June 15, 2004. The Company has evaluated the impact of the adoption
of EITF 03-1 and does not believe it will have a material effect on the
Company's financial condition or results of operations.
NOTE 5 - EARNINGS PER COMMON SHARE
Basic earnings per share is computed on the basis of the weighted
average number of common shares outstanding. Diluted earnings per share is
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. The components of basic and diluted earnings per share
are as follows:
Three Months Ended June 30, Six Months Ended June 30,
-------------------------------- --------------------------------
2004 2003 2004 2003
------------ ------------ ------------ ------------
(In thousands, except share and per share data)
Numerator for basic and diluted net
earnings per common share:
Net earnings $ 7,489 $ 5,947 $ 13,888 $ 10,980
------------ ------------ ------------ ------------
Denominator:
Weighted average outstanding shares of
common stock 23,211,954 22,619,854 23,166,504 22,455,428
Dilutive effect of:
Employee stock options 2,078,497 2,252,844 2,065,314 2,119,920
Warrants 294,166 330,472 292,793 304,922
------------ ------------ ------------ ------------
Common stock and common stock equivalents 25,584,617 25,203,170 25,524,611 24,880,270
------------ ------------ ------------ ------------
Net earnings per share:
Basic $ 0.32 $ 0.26 $ 0.60 $ 0.49
============ ============ ============ ============
Diluted $ 0.29 $ 0.24 $ 0.54 $ 0.44
============ ============ ============ ============
NOTE 6 - ACQUISITIONS
In March 2004, the Company completed two acquisitions. In the first
acquisition, the Company purchased substantially all of the assets and
operations of The Electric Mail Company Inc. ("Electric Mail"), a Canadian-based
provider of outsourced email and value-added messaging services. In the second
acquisition, the Company acquired all of the issued and outstanding shares of
capital stock of Jump B.V. ("Jump"), a Netherlands-based provider of
fax-to-email and unified messaging services. The aggregate purchase price for
these two acquisitions was US$6.0 million, payable in cash at closing, with a
contingent earn-out based on future revenues with respect to the Jump
acquisition. The transactions have been accounted for using the purchase method
and, accordingly, the results of operations of Electric Mail and Jump 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
identifiable net assets acquired amounted to approximately US$5.3 million of
which US$1.8 million was allocated to identifiable intangible assets. The
results of operations for Electric Mail and Jump during periods prior to our
acquisition were not material to our consolidated results of operations and,
accordingly, pro forma results of operations have not been prepared.
NOTE 7 - GOODWILL AND PURCHASED INTANGIBLE ASSETS
Intangible assets are recorded at cost, less accumulated amortization.
Amortization of intangible assets with finite lives is provided over their
estimated useful lives ranging from 30 to 132 months on a straight-line basis.
-8-
Amortization expense, included in general and administrative expense, during the
three- and six-month periods ended June 30, 2004 approximated $152,000 and
$230,000, respectively. Amortization expense is estimated to approximate
$726,000, $980,000, $934,000, $902,000 and $881,000 for the fiscal years ended
December 31, 2004, 2005, 2006, 2007 and 2008, respectively. Goodwill and a trade
name with an indefinite useful life are recorded net of accumulated amortization
through December 31, 2001. The changes in the carrying amount of goodwill for
the six months ended June 30, 2004 are as follows:
(In thousands)
Balance at December 31, 2003 $ 15,616
Acquisitions and other(1) 3,488
------------
Balance at June 30, 2004 $ 19,104
============
(1)Other primarily includes the effect of foreign currency translation. See also
Note 6 - Acquisitions.
As of June 30, 2004, intangible assets with finite lives, goodwill and
trade name balances, net of accumulated amortization were as follows:
Amortization Historical Accumulated
period cost amortization Net
------------- ------------ ------------ ------------
(In thousands)
INTANGIBLE ASSETS SUBJECT TO AMORTIZATION
- -----------------------------------------
Acquired product technology rights:
Patents 96-132 months $ 5,650 $ 266 $ 5,384
Customer relationships and software 30-60 months 2,071 110 1,961
INTANGIBLE ASSETS NOT SUBJECT TO AMORTIZATION
- ---------------------------------------------
Goodwill 19,104
Indefinite-lived trade name 1,268
NOTE 8 - INCOME TAXES
Income tax expense amounted to approximately $3.9 million and $280,000
for the three months ended June 30, 2004 and 2003, respectively. For the six
months ended June 30, 2004 and 2003, income tax expense was $7.6 million and
$515,000, respectively. During the six months ended June 30, 2004, deferred
income taxes decreased by $6.0 million primarily due to the offset of the
Company's tax liability against available net operating loss and the tax credit
carry-forwards. For the six months ended June 30, 2003, income tax expense was
substantially offset by net operating loss carry-forwards for which a valuation
allowance had previously been recognized against the deferred tax assets.
Income tax expense for the three and six months ended June 30, 2004 is
based on our worldwide estimated effective annual tax rate of approximately 35%.
NOTE 9 - SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for interest during the six-month periods ended June 30, 2004
and 2003 approximated $33,000 and $28,000, respectively, substantially all of
which related to long-term debt and capital leases.
The Company paid cash of approximately $787,000 and $60,000,
respectively, for income taxes during the six-month periods ended June 30, 2004
and 2003.
In the second quarter of 2004, the Company entered into a loan
arrangement approximating $100,000 to finance a corporate insurance policy.
-9-
During the six months ended June 30, 2004 and 2003, the Company entered
into capital lease arrangements for certain computer equipment and software
approximating $168,000 and $240,000, respectively.
Through the six months ended June 30, 2004 and 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 $1.0 million and $203,000, respectively.
NOTE 10 - LEGAL PROCEEDINGS
The Company is not currently aware of any legal proceedings or claims
that it believes are likely to have a material adverse effect on the Company's
business, prospects, financial condition, results of operations or cash flows.
On February 20, 2004, the Company filed a patent infringement suit
against Venali, Inc. ("Venali"), a Florida-based provider of Internet fax
solutions to businesses, in United States District Court for the Central
District of California, alleging that Venali infringes two of the Company's U.S.
patents. In this litigation the Company seeks monetary damages for past
infringement, injunctive relief prohibiting Venali from continuing to infringe
these patents, and attorneys' fees.
On April 21, 2004, Venali filed an answer and counterclaim, in which it
denied infringing the patents and counterclaimed for a declaration of
noninfringement and invalidity of the patents. The parties are in the process of
pretrial discovery and trial in the action is set for January 17, 2006.
While the Company is optimistic about its prospects, there can be no
guarantee or certainty of its ability to establish the claims the Company has
raised against Venali, or its ability to defend against Venali's counterclaims.
The Company intends to pursue its claims and defend against Venali's
counterclaims vigorously.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
- --------------------------------------------------------------------------------
of Operations
- -------------
ORGANIZATION AND DESCRIPTION OF BUSINESS
j2 Global Communications, Inc. ("j2 Global", "Our" or "We") is a
Delaware corporation founded in 1995. We provide outsourced, value-added
messaging and communications services to individuals and businesses around the
world. We offer fax, voicemail and email solutions, unified messaging &
communications services, document management solutions and conference calling
services. We market our services principally under the brand names eFax(R),
jConnect(R), JFAX(R), eFax Corporate(R), jBlast(R), eFax BroadcastTM,
PaperMaster(R), ConsensusTM, M4 InternetTM, ProtoFax(R) and Electric MailTM. We
deliver our services through our global telephony/Internet Protocol ("IP")
network, which offers local telephone numbers in more than 1,350 cities in 20
countries across five continents. During the second quarter of 2004, the Company
announced its plan to launch eVoiceTM, an enhanced voice messaging service
initially featuring voicemail-to-email and in the future a telephone user
interface, Smart Caller ID and real-time call screening.
Our core services, each of which operates in large and distinct
markets, include fax, voicemail, email, unified messaging & communications,
document management and conference calling. Individuals and businesses are
already using these services. Our challenge, therefore, is not to introduce new
services to prospective customers. Rather, it is to communicate to prospects how
our particular solutions are more secure, efficient and cost-effective than
traditional alternatives. In addition, we offer permission-based, personalized
email marketing services to help third parties maximize their advertising
efforts, and third party advertising services to our Free base of customers
(described below).
We operate in one reportable segment: value-added messaging and
communications services, which provides for the delivery of fax, voice and email
messages via the telephone and/or Internet networks. Our services are
distributed worldwide primarily over the telephone and Internet networks, and
thus, we do not consider our operations subject to any geographic segment
reporting.
-10-
We generate a substantial portion of our revenues from subscribers that
pay us for activation, subscription and usage fees. Activation and subscription
fees are referred to as "fixed" revenues, while usage fees are referred to as
"variable" revenues. We also generate a small percentage of our overall revenue
from advertising and international "calling party pays" arrangements to non-paid
subscribers (sometimes referred to as "Free" subscribers). These Free
advertising-supported subscribers also serve as a source for attracting new paid
subscribers. This process of migrating advertising-supported customers to paid
services is part of our life cycle management program. Through this program, we
monitor usage levels of advertising-supported customers, send them promotional
up-sell messages and cull out subscribers that do not adhere to the limitations
on our Free services set forth in our customer agreements.
Of the more than 7.3 million telephone numbers (sometimes referred to
as Direct Inward Dial numbers or "DIDs") deployed as of June 30, 2004,
approximately 469,000 were deployed to paying subscribers, with the balance
deployed to Free advertising-supported and international "calling party pays"
subscribers.
During the past three years, we have derived substantially all of our
revenues from the sale of our eFax Plus(R) and jConnect Premier(R) paid
services. These services are deployed through a DID. As a result, we believe
that paying DIDs and the revenues associated therewith are an important metric
for understanding our business. It has been and continues to be our objective to
increase the number of paying DIDs through a variety of distribution channels,
marketing arrangements and enhanced brand awareness. In addition, we
continuously seek to increase revenues through a combination of stimulating use
by our customers of usage-based services, introduction of new services and
instituting appropriate price increases to our fixed monthly subscription and
other fees.
The following table sets forth key operating metrics of our Company for
the three and six months ended June 30, 2004 and 2003:
June 30,
2004 2003
------------ ------------
(In thousands)
Advertising-supported telephone numbers 6,873 4,826
Paying telephone numbers 469 349
------------ ------------
Total active telephone numbers 7,342 5,175
============ ============
Three Months Ended June 30, Six Months Ended June 30,
2004 2003 2004 2003
------------ ------------ ------------ ------------
(In thousands except percentages and average revenue per paying telephone number)
Subscriber revenues:
Fixed $ 17,750 $ 11,177 $ 33,770 $ 21,093
Variable 7,313 5,130 13,355 9,668
------------ ------------ ------------ ------------
Total subscriber revenues $ 25,063 $ 16,307 $ 47,125 $ 30,761
============ ============ ============ ============
Percentage of total subscriber revenues:
Fixed 70.8% 68.5% 71.7% 68.6%
Variable 29.2% 31.5% 28.3% 31.4%
Revenues:
DID based revenues $ 24,057 $ 15,835 $ 45,721 $ 29,898
Non-DID based revenues 1,774 1,202 3,052 2,347
------------ ------------ ------------ ------------
Total revenues $ 25,831 $ 17,037 $ 48,773 $ 32,245
============ ============ ============ ============
Average revenue per paying
telephone number(1) $ 17.22 $ 15.52 $ 16.96 $ 15.44
============ ============ ============ ============
(1) See calculation of average revenue per paying telephone number at the end of
this section, Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.
-11-
DISCUSSION OF CRITICAL ACCOUNTING POLICIES AND ESTIMATES
In the ordinary course of business, we have made a number of estimates
and assumptions relating to the reporting of results of operations and financial
condition in the preparation of our financial statements. Actual results could
differ significantly from those estimates under different assumptions and
conditions. There have been no changes in the Company's critical accounting
policies during the six months ended June 30, 2004.
RESULTS OF OPERATIONS FOR THE THREE- AND SIX-MONTH PERIODS ENDED JUNE 30, 2004
AND 2003
REVENUES
SUBSCRIBER REVENUES. Subscriber revenues are comprised primarily of monthly
recurring subscription and usage based fees. Subscriber revenues were $25.1
million and $16.3 million for the three months ended June 30, 2004 and 2003,
respectively. For the six months ended June 30, 2004 and 2003, subscriber
revenues were $47.1 million and $30.8 million, respectively. The increase in
subscriber revenues was due to an increase in our base of paying subscribers
combined with a price increase discussed below. The increase in our base of paid
subscribers was the result of new sign-ups derived from word-of-mouth, Internet
advertising, inside and outside sales forces and conversions of existing Free
advertising-supported customers to paid services, net of cancellations during
the quarter.
At the end of the second quarter of 2003, we implemented a price
increase for new individual subscribers. Commencing at the end of the third
quarter of 2003, we began implementing this same price increase to a substantial
portion of our existing individual subscribers, which at the time represented
slightly more than half of our subscriber revenues. These price changes resulted
in increased monthly recurring revenues of between $2.50 and $3.00 per
individual paying customer, depending on the services provided. As of June 30,
2004, implementation of the price change to existing customers is substantially
complete. The results of these price changes exceeded our expectations in terms
of the rate of sign-ups and cancellations (i.e., we did not see a material
decrease in new customer sign-ups and cancellations of existing subscribers were
lower than anticipated). However, due to a number of factors affecting the
Company's net sign-ups and related revenues during a given reporting period, it
is not possible to quantify the financial impact of the price increase.
ADVERTISING. Advertising revenues were $647,000 and $609,000 for the three
months ended June 30, 2004 and 2003, respectively. For the six months ended June
30, 2004 and 2003, advertising revenues were $1.4 million and $1.2 million,
respectively. We generate advertising revenues primarily by delivering email
messages on behalf of advertisers to our Free advertising-supported customers.
The increase in advertising revenues was due primarily to an increase in the
size of our Free advertising-supported customer base which was partially offset
by a decline in email advertising prices.
LICENSING AND OTHER. Licensing and other revenues were $121,000 for both the
three months ended June 30, 2004 and 2003. For the six months ended June 30,
2004 and 2003, licensing and other revenues were $240,000 and $263,000,
respectively. Throughout these periods, our licensing and other revenues have
consisted primarily of revenues from licensing our PaperMaster document
management software.
COST OF REVENUES. Cost of revenues is comprised primarily of costs associated
with data and voice transmission, telephone numbers, customer service, on-line
processing fees and equipment depreciation. Cost of revenues was $4.1 million,
or 16% of total revenues, and $3.2 million, or 19% of total revenues, for the
three months ended June 30, 2004 and 2003, respectively. For the six months
ended June 30, 2004 and 2003, cost of revenues were $7.7 million, or 16% of
total revenues, and $6.3 million, or 19% of total revenues, respectively. The
increase in cost of revenues was due primarily to costs incurred in building and
expanding our network infrastructure, enhancing and growing our customer support
services, and incurring increased variable transmission costs associated with a
larger subscriber base and increased usage. Cost of revenues as a percentage of
revenues decreased as a result of increases in revenues over the same periods
with a relatively stable level of cost of revenues.
OPERATING EXPENSES
SALES AND MARKETING. Sales and marketing expenses are comprised primarily of
payments to sales and marketing personnel, advertising expenses and other
business development related expenses. Sales and marketing expenses
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were $4.8 million, or 18% of total revenues, and $2.9 million, or 17% of total
revenues, for the three months ended June 30, 2004 and 2003, respectively. For
the six months ended June 30, 2004 and 2003, sales and marketing expenses were
$8.5 million, or 18% of total revenues, and $5.4 million, or 17% of total
revenues, respectively. The increase in sales and marketing expenses was due
primarily to increased Internet-based advertising spend and additional marketing
personnel. Our Internet-based advertising relationships consist primarily of
fixed cost and performance-based (cost-per-impression, cost-per-click, and
cost-per-acquisition) advertising relationships with an array of on-line service
providers. During the second half of 2003, we experienced upward pricing
pressure for Internet-based advertising, and we expect this trend to continue
through at least the balance of 2004.
RESEARCH, DEVELOPMENT AND ENGINEERING. Our research, development and engineering
costs consist primarily of personnel-related expense. Research, development and
engineering costs were $1.3 million, or 5% of total revenues, and $1.0 million,
or 6% of total revenues, for the three months ended June 30, 2004 and 2003,
respectively. For the six months ended June 30, 2004 and 2003, research,
development and engineering costs were $2.3 million, or 5% of total revenues,
and $2.0 million, or 6% of total revenues, respectively. The increase in
research, development and engineering costs was primarily due to an increase in
personnel costs to maintain our existing services, accommodate our service
enhancements, develop and implement additional service features and
functionality and continue to bolster our infrastructure security. Research,
development and engineering costs as a percentage of revenues decreased as a
result of increases in revenues over the same periods versus a more stable level
of research, development and engineering expenses.
GENERAL AND ADMINISTRATIVE. Our general and administrative costs consist
primarily of personnel-related expenses, depreciation and amortization, bad debt
expense and insurance costs. General and administrative costs were $4.7 million,
or 18% of total revenues, and $3.7 million, or 22% of total revenues, for the
three months ended June 30, 2004 and 2003, respectively. For the six months
ended June 30, 2004 and 2003, general and administrative costs were $9.2
million, or 19% of total revenues, and $7.2 million, or 22% of total revenues,
respectively. General and administrative costs as a percentage of revenues
decreased as a result of increases in revenues over the same periods and general
and administrative costs increased at a slower rate than revenues.
AMORTIZATION OF OTHER INTANGIBLES. Amortization of intangible assets with finite
lives is provided over their estimated useful lives ranging from 30 to 132
months on a straight-line basis. Amortization of intangibles, included in
general and administrative expenses, aggregated $152,000 and $31,000 for the
three months ended June 30, 2004 and 2003, respectively and $230,000 and $56,000
for the six months ended June 30, 2004 and 2003, respectively.
INTEREST AND OTHER INCOME. Our interest and other income is generated from
interest earned on cash, cash equivalents and short- and long-term investments.
Interest and other income amounted to $352,000 and $69,000 for the three months
ended June 30, 2004 and 2003, respectively, and $538,000 and $143,000 for the
six months ended June 30, 2004 and 2003, respectively. The increase in interest
and other income was primarily due to higher cash and investment balances for
2004 and a shift in allocation to investments with longer maturities.
INCOME TAXES. Income tax expense amounted to approximately $3.9 million and
$280,000 for the three months ended June 30, 2004 and 2003, respectively. For
the six months ended June 30, 2004 and 2003, income tax expense was $7.6 million
and $515,000, respectively. For the six months ended June 30, 2003, income tax
expense was substantially offset by net operating loss carry-forwards for which
a valuation allowance had previously been recognized against the deferred tax
assets.
Income tax expense for the three and six months ended June 30, 2004 is
based on our worldwide estimated effective annual tax rate of approximately 35%.
LIQUIDITY AND CAPITAL RESOURCES
Our cash and cash equivalents and short-term investments were $56.1
million at June 30, 2004. Our primary sources of liquidity are cash flows
generated from operations, together with cash and cash equivalents and
short-term investments. Net cash provided by operating activities was $23.3
million and $13.9 million for the six months ended June 30, 2004 and 2003,
respectively. Our operating cash flows result primarily from cash received from
our subscribers, offset by cash payments we make to third parties for their
services and employee compensation. More than two-thirds of our subscribers pay
us by using their credit cards and therefore our receivables from subscribers
-13-
settle quickly. We invest our short- and long-term investments primarily in
high-grade debt securities. Allocations of our total cash and cash equivalents
and short- and long-term investments on hand will generally vary during any
given reporting period based on our short-term working capital requirements and
return on investment opportunities.
Net cash used in investing activities was approximately $19.0 million
and $3.6 million for the six months ended June 30, 2004 and 2003, respectively.
For the first two quarters of 2004, net cash used in investing activities was
primarily attributable to purchases of investments, acquisition of businesses,
purchases of intangible assets and purchases of property and equipment. For the
first two quarters of 2003, net cash used in investing activities was primarily
comprised of purchases of investments, property 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.
Net cash used by financing activities was approximately $256,000 for
the six months ended June 30, 2004. Net cash provided by financing activities
was approximately $1.4 million for the six months ended June 30, 2003. Net cash
used by financing activities in 2004 was comprised primarily of repayments of
long-term debt and capital lease obligations, offset by proceeds from the
exercise of stock options, warrants and common shares issued under our employee
stock purchase plan. For the first two quarters of 2003, net cash provided by
financing activities was primarily comprised 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.
We have an investment with an immaterial carrying amount in Oasis
Semiconductor, Inc. ("Oasis"), a privately-held company. This investment in an
equity security is accounted for under the cost method and is included in "other
assets" on our consolidated balance sheet. In March 2004, Oasis filed a
registration statement on Form S-1 with the United States Securities and
Exchange Commission regarding its intent to initiate an initial public offering
("IPO"). On April 27, 2004, Oasis filed an amended registration statement on
Form S-1 indicating our intent to sell approximately 420,000 shares in the
offering, resulting in us owning slightly under 10% of Oasis' issued and
outstanding shares of capital stock after the offering. However, we are unable
to determine when and if Oasis will complete the IPO, and if so, at what
offering value. If this offering were to be completed, our carrying value or
related proceeds from the offering may become material.
We currently anticipate that our existing cash and cash equivalents and
short-term investment balances will be sufficient to meet our anticipated needs
for working capital and capital expenditures for at least the next 12 months.
CONTRACTUAL OBLIGATIONS AND COMMERICAL COMMITMENTS
PURCHASE OBLIGATIONS
During the first quarter of 2004, we entered into an obligation to
purchase computer software and related services totaling $2.6 million.
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 15, 2004 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:
-14-
o Sustain growth or profitability;
o Continue to maintain, expand and retain our customer base;
o Compete with other similar providers with regard to price, service and
functionality;
o Cost-effectively procure large quantities of telephone numbers in
desired locations in the United States and abroad;
o Achieve business and financial objectives in light of burdensome
telecommunications or Internet regulation;
o Obtain large quantities of non-paying users on a cost effective basis,
and effectively derive revenues from those users through advertising
to them and selling them paid services;
o Successfully manage our cost structure, including but not limited to
our telecommunication and personnel related expenses;
o 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 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 and security of customer data and
messages;
o Introduce new services and achieve acceptable levels of
returns-on-investment for those new services; and
o Recruit and retain key personnel.
-15-
Calculation of Average Revenue per Paying Telephone Number:
Three Months Ended June 30, Six Months Ended June 30,
2004 2003 2004 2003
------------ ------------ ------------ ------------
(In thousands except average revenue per paying telephone number)
DID based revenues $ 24,057 $ 15,835 $ 45,721 $ 29,898
Less:
Advertising revenue 647 609 1,408 1,221
Other indirect revenues 60 -- 80 --
------------ ------------ ------------ ------------
Total paying telephone number revenues $ 23,350 $ 15,226 $ 44,233 $ 28,677
============ ============ ============ ============
Average paying telephone number monthly
Revenue (total divided by number of months) $ 7,783 $ 5,075 $ 7,372 $ 4,780
Number of paying telephone numbers
Beginning of period 435 305 400 270
End of period 469 349 469 349
Average of period 452 327 435 310
Average revenue per paying telephone number $ 17.22 $ 15.52 $ 16.96 $ 15.44
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. During 2004
and future years, we believe we will expand our international customer base and,
as a result, we expect a greater level of foreign currency market risk.
We invest our cash primarily in high-grade interest-bearing securities.
Our return on these investments is subject to interest rate fluctuations.
We do not have derivative financial instruments for hedging,
speculative or trading purposes.
Item 4. Controls and Procedures
- -----------------------------------
As of June 30, 2004, the end of the period covered by this report, j2
Global's management, with the participation of our President (principal
executive officer) and Chief Financial Officer (principal financial officer),
carried out an evaluation of the effectiveness of our disclosure controls and
procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of
1934). Based upon that evaluation, our President (principal executive officer)
and Chief Financial Officer (principal financial officer) concluded that these
disclosure controls and procedures
-16-
were effective as of the end of the period covered in this report. In
addition, no change in our internal control over financial reporting (as defined
in Rule 13a-15(f) under the Securities Exchange Act of 1934) occurred during the
quarter ended June 30, 2004 that has materially affected, or is reasonably
likely to materially affect, our internal control over financial reporting.
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 condition, results of operations or cash flows.
On February 20, 2004, we filed a patent infringement suit against
Venali, Inc. ("Venali"), a Florida-based provider of Internet fax solutions to
businesses, in United States District Court for the Central District of
California, alleging that Venali infringes two of our U.S. patents. In this
litigation we seek monetary damages for past infringement, injunctive relief
prohibiting Venali from continuing to infringe these patents, and attorneys'
fees.
On April 21, 2004, Venali filed an answer and counterclaim, in which it
denied infringing the patents and counterclaimed for a declaration of
noninfringement and invalidity of the patents. The parties are in the process of
pretrial discovery and trial in the action is set for January 17, 2006.
While we are optimistic about our prospects, there can be no guarantee
or certainty of our ability to establish the claims we have raised against
Venali, or our ability to defend against Venali's counterclaims. We intend to
pursue our claims and defend against Venali's counterclaims vigorously.
Item 4. Submission of Matters to a Vote of Security Holders
- ------------------------------------------------------------
Our 2004 Annual Meeting of Shareholders was held on April 28, 2004
in Los Angeles, California. There were 23,139,596 shares of our common stock
entitled to be voted on March 15, 2004, 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 directors nominees to serve for the
ensuing year and until their successors are elected and
qualified. All nominees were elected as directors with the
following vote:
Nominee For Withheld or Abstained
------- --- ---------------------
Douglas Y. Bech 21,114,111 260,204
Robert J. Cresci 20,815,357 558,926
Richard S. Ressler 20,113,802 1,260,481
John F. Rieley 20,125,771 1,248,512
Michael P. Schulhof 21,114,334 259,949
2. To ratify the appointment of Deloitte & Touche LLP as our
independent auditors for fiscal 2004. This proposal was approved
with the following vote:
For Against Abstain Broker Non-Votes
--- ------- ------- ----------------
21,229,100 124,912 20,303 --
-17-
Item 6. Exhibits and Reports on Form 8-K
- --------------------------------------------
A. Exhibits
31(a) Rule 13a-14(a) Certification by Chief Executive Officer
in accordance with Section 302 of the Sarbanes-Oxley
Act of 2002
31(b) Rule 13a-14(a) Certification by Chief Financial Officer
in accordance with Section 302 of the Sarbanes-Oxley
Act of 2002
32(a) Section 1350 Certification by Chief Executive Officer
in accordance with Section 906 of the Sarbanes-Oxley
Act of 2002.
32(b) Section 1350 Certification by Chief Financial Officer
in accordance with Section 906 of the Sarbanes-Oxley
Act of 2002.
B. Reports on Form 8-K
Item Description Filing Date
---- ----------- -----------
7,9,12 Regulation FD disclosure regarding first April 20, 2004
quarter 2004 financial results, financial
estimates for second quarter and fiscal
year 2004, and April 2004 Investor
Presentation.
7,9,12 Regulation FD disclosure regarding first April 21, 2004
quarter 2004 financial results (financial
tables).
7,9 Regulation FD disclosure regarding j2 Global's June 17, 2004
presentation at the Thomas Weisel Partners
Growth Forum 6.0 Conference.
5,7 Press release announcing the Company had June 30, 2004
acquired a portfolio of Internet-messaging
technology patents and patent applications
From NetOffice Solutions, LLC, and that
it was issued two new U.S. patents for
intellectual property developed internally.
ITEMS 2, 3 AND 5 ARE NOT APPLICABLE AND HAVE BEEN OMITTED.
-18-
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 9, 2004 By: /s/ R. SCOTT TURICCHI
-----------------------------
R. Scott Turicchi
Chief Financial Officer
(Principal Financial Officer)
Date: August 9, 2004 By: /s/ GREGGORY KALVIN
-----------------------------
Greggory Kalvin
Chief Accounting Officer
(Principal Accounting Officer)
-19-
INDEX TO EXHIBITS
- -----------------
Exhibit Number Description
-------------- -----------
31(a) Certification of Chief Executive Officer pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002.
31(b) Certification of Chief Financial Officer pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002.
32(a) Certification of Chief Executive Officer pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002.
32(b) Certification of Chief Financial Officer pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002.
-20-